Japanese gyrations

The first response to the Japanese money burst was positive. The markets liked it, drove down the yen and celebrated by pushing up Japanese share prices. The commentators liked it, because it was bold and exciting. The real economy responded, with more growth. Some prematurely celebrated a break through for the new policy.

Then came the big sell off last week. Share prices plunged 7.6% in a day. Markets recoiled in horror, as bond prices fell and government bond interest rates rose, despite the very large buying programme the governemnt had announced. The commentators started complaining that the government was contradictory. It said it intended to keep bond interest rates very low by massive buying of the bonds, but it also said it would trigger faster inflation which they thought meant higher interest rates.

The government hopes for higher inflation before it loses control of very low bond yields. It can keep on buying trying to keep the yields down. As so much of this depends on gaining or retaining market confidence, the Japanese authorities have to work on improving their forecasts and making their script easier on the ears of the investors.

Meanwhile what really matters is how quickly they develop the third arrow of their economic archery – radical supply side reform. Only if they introduce more competition to Japanese commercial life, challenge restrictive practises and cartels, is the extra money released likely to do more good and trigger faster growth backed by rising productivity. In the end you need more and better products which people want to buy if you are to achieve sustainable growth. No amount of monetary tinkering can replace the need for innovation, higher productivity and good design. Competitve markets usuallly help secure those.


  1. lifelogic
    May 29, 2013

    Fair competition, to allow investment in innovation, technical development and improved efficiency. Rigging the finance markets just provide perverse incentives and encourages the wrong investment decisions in the main.

    1. lifelogic
      May 29, 2013

      What is the point of an expensive new routemaster bus with doors on it – the whole advantage was to be able to jump on and off them at will, rather than be held captive in a jam.

      1. Bazman
        May 29, 2013

        The Routemaster bus theory is the sign of a fool. As you all k-now…

  2. Mike Stallard
    May 29, 2013

    Us next.

    The other thing is that the Japanese are not in the EU. If they were, under the latest plans, they would have to submit their budgets to the Commission for approval. Then everything would be all right once more.

  3. Andyvan
    May 29, 2013

    1. When, in all the history of the world, has debasing a nations currency ever led to prosperity?
    2. In the absence of any successful example what makes all the politicians and bankers so enamored with this concept that they risk economic ruin for us all?

    My answers to those questions would be 1. Never. 2. They are too stupid to see it but they will ensure the ruin does not extend to themselves when it becomes so obvious that even a politician can see it.

    1. zorro
      May 29, 2013

      But are politicians really that stupid?………No, I don’t think so.


  4. Gary
    May 29, 2013

    And you cannot get competitive markets when the central bank rigs rates. Rigged rates cause mispricing of risk and that leads to misallocation of investment capital and that leads to unproductive zombie companies. There is no long term salvation through money printing.

  5. Martin
    May 29, 2013

    Japan has some very difficult energy problems.

    After Fukoshima they have moved away from nuclear (despite it being a flooded diesel backup generator problem). Japan has little oil, gas or coal. Its only indigenous power is wind and maybe tidal energy.

    Another danger for Japan is a devaluation spiral as higher energy prices force costs up etc.

    1. lifelogic
      May 29, 2013

      They just need more, new nuclear, further back from the coast. The UK does too.

  6. APL
    May 29, 2013

    JR: “The markets liked it, drove down the yen and celebrated by pushing up Japanese share prices”

    So for domestic participants it appears good, but for international holders it’s neutral at best.

  7. D Hope
    May 29, 2013

    This does strike me as a very risky strategy by the Japanese Central Bank. Let’s be honest, no one knows what will happen, there is little precedent. Might it not be possible that deflation is not the issue but merely a symptom of other problems which deflation has provided ordinary people some shielding from.

    If life becomes expensive but growth doesn’t return the average citizen won’t be happy. A bit like here!

    It strikes me central banking really has got out of control all over the world. It isn’t a substitute for competitive wages, an educated and innovative workforce, low regulation, good infrastructure and transport links etc etc

  8. Denis Cooper
    May 29, 2013

    If a government has arranged for the market in its own bonds to be rigged on a large scale then that can hardly go unnoticed in high financial circles, even if the general public don’t fully grasp what is being done let alone why.

    For a start, obviously the usual market participants must be aware of it when whoever is doing the rigging openly offers to buy up some of their holdings; in our case, that is the Bank of England, which issues a market notice prior to each of its reverse auctions when it uses newly created money to buy up previously issued gilts from investors.

    But even if a central bank tries to keep its operations to rig the market under wraps by making its government bond purchases through proxies, as appears to be the case with the ECB, it won’t be long before word leaks out to those who matter in the market.

    As all the usual participants in the market know very well that it is a false market, and in many cases are very willing to make a turn by co-operating with the authorities in their systematic rigging of the market, surely any movement in prices is more likely to reflect their changed perception of the future prospects for the rigging of the market rather than the future prospects for the real economy?

    Personally I think it would be better for the central bank to transparently lend money to the government to help fund its budget deficit, rather than doing it indirectly by buying up its previously issued bonds on the secondary market while in parallel the government is selling new bonds to much the same set of investors at much the same rate, creating a false market; but of course that open direct funding is expressly forbidden by Article 123 of the Treaty on the Functioning of the European Union.

    1. Gary
      May 29, 2013

      “Personally I think it would be
      better for the central bank to
      transparently lend money to the

      Unless, the intention of the central bank is to only help its member banks, and everyone else be damned?

      1. Denis Cooper
        May 29, 2013

        I’m not aware that the Bank of England has any “member banks”; and the Bank being owned by the Treasury it has been pressed into service to help the Treasury with its small problem of the government spending far more than it gets in and potentially running out of willing private lenders.

  9. Lindsay McDougall
    May 29, 2013

    Japan is basically trying to ape what the UK Chancellor and BoE Governor have been doing here. They have an even larger public sector debt than we have, and they too look to repay their creditors in clipped coinage.

  10. Richard1
    May 29, 2013

    They need bank balance sheet restructuring also. Years of QE have left a lot of zombie companies financed by zombie loans from zombie banks in place. They will only get recovery once those are cleared out. The same unfortunately is now true in the UK and elsewhere in Europe. The US having had a more radical approach is in better shape in this regard.

  11. margaret brandreth-j
    May 29, 2013

    exactly.. money not corresponding to anything but itself is futile.

  12. Rods
    May 29, 2013

    With all of the money stimulus going on in the world we are seeing the creation of equity and bond bubbles blowing up before our eyes. Neither of these are priced on economic fundamentals. PE ratios are going up as businesses are increasingly missing sales and profit targets and are Italy and Spain now much better economic risks than 12 months ago as there bond yields suggest?

    A new crisis will trigger a market correction at some point this year, like the next round of the Spanish banking crisis.

    All these stimulus are being used to try to race to the bottom in the current global currency wars to try and make exports more competitive. A bit like WWI trench warfare, lots of expenditure of time, materials and money, many casualties all for no real gain. All this money creation is producing no or little economic growth, so further down the road we are going to see big rises in inflation.

    No country seems to have any idea on how to kick start growth at the moment with stimulus lead stagflation with falling real wages certainly not being a successful policy. For high tax and public spending countries, public spending and tax cuts would be a good place to start.

  13. uanime5
    May 29, 2013

    Not sure what you’re talking about regarding a lack of competition, cartels, and poor quality products. Most of the industries Japan excels in already have a high level of competition and their products are made to a high standard (cars, electronics, video games).

    Also it seems that Japan’s massive money stimulus, introduced last year, resulted in the OECD increasing growth forecasts from 0.7% to 1.6%.

    Reply Try reading what the Japanese government is saying as they probably know their problems better than you.

    1. uanime5
      May 30, 2013

      John I am asking you about your claims because according to the Global Competitiveness Report, which evaluates the competitiveness of 144 countries, in 2012-13 Japan came 10th. So it seems that Japan isn’t having problems with its competitiveness at an international level.


      While the third arrow of Abenomics is about structural reform as there’s no plans to outlaw keiretsu, introduce more anti-cartel laws, change competition laws, or introduce laws to improve product quality it’s likely that the Japanese Government doesn’t consider any of these a major problem compared to the other problems Japan faces. However we won’t know what changes the Japanese Government feels it needs to make until they publish these economic plans in June.

  14. Gary
    May 29, 2013

    You ain’t seen nothing yet. They are going to run our printers white hot, to print our way to economic nirvana. Straight out of the Bob Mugabe playbook.

    “Mark Carney will try to devalue
    the pound by as much as 15
    percent after he takes over as
    Bank of England Governor in July
    in a last ditch attempt to cement
    the UK recovery, Pimco, the
    world’s largest bond house, has


    1. Denis Cooper
      May 29, 2013

      Well yesterday the sterling trade weighted index was 79.9; 15% off that would take it to around 68, 8% below its all-time low of 73.8 on December 30th 2008; he may try to do that, I hope not, but even if he tries he may not succeed.

  15. Robert Taggart
    May 29, 2013

    As am sure you will remember well Johnny – Japan was hailed as the ‘model economy’ in the ’80’s – so much so, Blighty in its ‘doldrum years’ (’70’s to early ’80’s) – could not get enough of it.
    This has not been the case for nigh on fifteen years now ? Who would have imagined that then ??
    Schardenfraude ? – Mm !

  16. Leslie Singleton
    May 29, 2013

    Don’t worry too much about the Japanese–at least they have absolute control of their borders and of their few and almost entirely temporary immigrants. If I were to spell out exactly what they do in these matters you would probably decide you could not ventilate it. Strangely though, never hear much complaint or even comment about this from the West.

  17. Mike Wilson
    May 29, 2013

    It amazes me that everyone has been so hell bent on the virtues of globalization. Capitalism is a race to the bottom. No matter what goods or services you provide, someone else will provide them cheaper. I’m not really sure what the 65 million of us on this island are all supposed to do all day when we don’t make goods and more and more services are going abroad. We can’t all be hairdressers and do garden maintenance etc.

    I do wish the government had a strategy that involved a 10 to 20 year horizon. We need to develop sustainable self sufficiency in energy and food production. That has to be our number 1 priority. Instead all we hear is endless platitudes about the deficit being down by a third – as if borrowing £120 billion a year is a good thing!

  18. Jon
    May 29, 2013

    In the 1980s I was wholly fascinated by reading their growth and structure, zaibatsu and then post war keiretsu structures. I am well out of date but it sounds like those successful keiretsu corporate structures have become restrictive cartels. If the governments and regulators stop manically scrawling changes to financial services then I may get time again to catch up.

    1. uanime5
      May 30, 2013

      Technically only horizontal keiretsu are like a cartel (illegal), while vertical keiretsu are like companies collaborating (legal). Also collaboration has been shown to be good for customers because it provides companies with more information about the materials available to them, enabling these companies to produce better quality or cheaper products.

  19. outsider
    May 29, 2013

    Dear Mr Redwood,
    There is one crucial lesson that we need to learn from Japan, which you implied but did not state. No macroeconomic policy can stimulate economic growth, though it can of course hasten recovery from a non-structural cyclical downturn.
    Attempts to stimulate underlying growth through macro policy just create distortions and are therefore worse than doing nothing.

    Japan also has a crucial lesson to learn from the UK. Your National Debt can be monetised in a face-saving kind of way so long as there is little internally generated inflation of goods prices. Even if it is not formally monetised, getting the central bank to absorb government borrowing can reduce the debt service cost to near zero, whatever the prevailing rate of interest.

    Beyond that, however, we should not be offering economic advice to Japan. That country pays its way in the world. In terms of goods and services ( not housing) living standards are still higher than in the UK. Unemployment remains low relative to US/EU standards. Society is more cohesive around a shared culture, partly because pretax incomes are less unequal. And that is because some service sectors are protected from full competition ( as opposed to the manufacturing sector Uanime5 writes about). When a poll of Japanese consumers asked what they wanted to buy, the majority famously said “Nothing”. So if Japan chooses social cohesion, less income disparity and less of the tax needed to redistribute wildly unequal incomes ahead of GDP growth, that is their business.

    Sadly, the UK’s economic problems are far bigger and far more intractable than Japan’s.

  20. mattu
    May 29, 2013


    I hope you will find something to say about “The whiff of suspicion over the Chilcot Inquiry”. This does not smell good for David Cameron … or Tony Blair.


    Reply: I have no insights or inside knowledge to give about these unsubstantiated allegations and rumours.

  21. rick hamilton
    May 30, 2013

    Japan has a huge national debt but it is mostly held by the Japanese themselves. They could slash the debt by robbing the citizenry in punitive taxes, but nobody will vote for that. It doesn’t have the EU albatross around its neck but there are destructive earthquakes, tsunamis etc to be paid for.

    Their politicians are just as awful as anywhere (speaking as a resident of Tokyo I could go on at length) but Japan is not a country of high-flown rhetoric and there is much more concentration on the facts – and I would say a far higher standard of numeracy and understanding of technology than in the UK, even among the general public. They do actually go through economic charts and figures in detail on prime time TV.

    As for power, Japan has developed a new clean-burn coal technology and is exploring large-scale extraction of methane hydrate from the ocean floor. They also plan to expand geothermal plants. Nuclear will come back on stream as safety standards are improved and public opposition wanes. They do not pay landowners subsidies stolen from regular taxpayers to construct thousands of useless windmills.

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