We are constantly told we need to look to Japan to learn the lessons of crisis mismanagement. Japan can teach us what happens when you don’t allow immigration; what happens when you allow deflation to take hold; what happens when you allow companies to ignore shareholders; and what happens to your exporters if you don’t constantly work to keep your currency down. But there is one lesson no one in a position of authority seems to much want us to learn – the impossibility of pulling back from massive monetary stimulus.
In their latest market commentary, Chris Andrew and Mustafa Zaidi of Clarmond Advisors remind us of the Japan of the 1930s. The finance minister at the time was Korekiyo Takahashi, a man who it seems is something of a hero to Ben Bernanke – in 2003, Bernanke referred to him as having “brilliantly rescued Japan from the Great Depression through reflationary policies in the early 1930s”.
You’ll be wondering how he did this – given how tricky rescuing economies from deflationary pressures appears to be these days. Simple really, say the Clarmond lot. He took Japan off the gold standard (allowing the yen to float freely), outlawed the conversion of paper currency to gold, slashed interest rates to the bone, enacted massive government spending and made it legally possible for the Bank of Japan to buy and hang on to government bonds (hello QE). It worked.
Equities boomed, the yen collapsed, exports soared and growth hit 6%. Then Takahashi started trying to get out. And it stopped working – his attempt to reverse some of the QE in 1935 resulted in a failed auction, something that told him the deficit spending had to come to an end. Unfortunately for him, most of the spending was going on warfare and the military didn’t much fancy any spending cuts.
The result? An irritable group of young officers, keen not to see the flow of public cash to their cause diminished in any way, hacked the 82-year-old finance minister to death. The new finance minister saw sense and continued with the spending and the BOJ bond-buying programme. Today, Japan’s debt levels are among the highest in the world.
The lesson here? It’s pretty obvious. Once you start a programme like this – however good your intentions in the first place – it is all but impossible to get out again. That’s true of fiscal policy – will it ever really be possible for a modern elected government to default on the welfare promises of past governments? And it is true of monetary policy too.
How can all the bonds that have been bought in by central banks ever be sold again without causing horrific disruption in the form of fast rising interest rates? As Andrew and Zaidi say, Chairman Bernanke may one day wish he had “never invoked the spectre of Korekiyo Takahashi”.