Bank of Japan’s first rate hike in 17 years is a damp squib
“Stop press! Bank of Japan hikes rates for first time in 17 years! The age of deflation is over!”.
Easy tiger, the BoJ’s decision to shift its policy rate from -0.1 per cent to a band of 0 per cent to 0.1 per cent is worth noting but it is not the earth-shattering change some in the media might wish it to be. Sure, it’s worth a headline or three that the sign in front of the 0.1 per cent has gone from a minus to a plus but, in the greater scheme of things, that is moving rates by what is not much more than a rounding error. I have watched Japan over many decades – from when it was hailed as “The Land of the Rising Yen” and held up to all of us over here in the West as hosting the economic model which all of us should be following and which was predicted to bury us once and for all. Endless TV programmes were run which always began with the collective workforce standing out in the factory yard in clean and pressed uniforms, similar to the then customary band of Bond movie baddies’ workers beavering away to bring the world to an end, performing calisthenics to music. Jobs for life was the cry.
As both America and especially Britain were recovering from the massive de-industrialisation of the 1970s and 1980s and unemployed workers were being encouraged to give up hope of returning to the skilled jobs they had lost, de-unionised employment was popping up assembling TVs and other kit for Japanese companies which were commissioning innocuous buildings on the sites of formerly grand domestic industries. It seemed as though Japan had found the goose that laid the golden egg and unless we could successfully copy the model, we would remain on the road to socioeconomic oblivion. And supporting this whole Nirvana was Mrs Watanabe.
Mrs Watanabe was, and maybe still is, the Japanese equivalent of Megan SixPack. At the time, Japan had not yet embraced the concept of both partners in a marriage going out to work so the wife stayed at home where she cooked, washed, waited for Mr Watanabe to return from drinking with his peers or from the pachinko parlour and managed the family finances. Mrs Watanabe would save every surplus yen and, by way of door-to-door money collectors, invest it all in the stock market. The stock market went up and up; how could it not seeing as that it was supported by an endless wall of domestic cash? Asset prices rose and rose on the back of the seemingly unstoppable progression of Japanese industry towards taking over the world. The blindly admired 1980s equivalents of today’s Magnificent Seven were Toyota, Honda, Mitsubishi, Sony, and Nippon Steel. Japanese banks threatened to take over the world with Nomura and Industrial Bank of Japan being the flag carriers although the likes of Norinchukin, the main agricultural lender, Dai-Ich Kangyo and Fuji Bank were not far behind.
The stock market rose and rose and only an idiot could not see that, with the naive but utterly reliable Mrs Watanabe holding up the edifice, nothing could go wrong. The Nikkei, even at 39,000 pts at year end of 1998 was a near risk-free screaming buy.
Pop goes the weasel.
The commercial real estate bubble in Tokyo burst, banks fell like ninepins and suddenly formerly uncritical observers began to look at what was going on behind the façade. There they found that not all 150 million Japanese were part of the advanced economy, that there was a vast hinterland that was underdeveloped and struggling to make it into the 20th century, let alone prepare for the 21st. Japan’s agricultural sector was largely still medieval and lived on huge government rice subsidies. As the asset bubble deflated, the government stepped in to support the economy by driving infrastructure spending in those far-flung parts of the empire that had been left behind. All the while, Korean chaebols, which are powerful conglomerates, were busily trying to eat Japan’s lunch. Whether TVs or super tankers, what Japan had once owned was being chipped away at by the Koreans. And all of a sudden, the virtue of Japan’s eschewing immigration became a vice as the much-lauded health of the nation led to the demographic pyramid inverting with rising longevity and an increasing shortage of young people to support the rising social cost of a geriatric society.
With rising life expectancy and the fear of future poverty, the people of Japan began to save. And save. And save some more. Household consumption stalled. Prices fell as sellers tried to entice buyers and the seeds were planted for the better part of three decades of embedded deflation. The Bank of Japan cut rates again and again in order to effectively discourage saving while the government deficit-funded infrastructure spending on anything and everything it could think of. Thus the famed image of billions of yen being wasted on building bridges between unpopulated islands. Of those, Japan has more than enough. Although there were plenty of savings, the miserable low rates on Japanese government bonds fooled no one. Treasuries remained trumps and according to US Treasury data, Japan remains the largest foreign holder of US debt. Of that, in December 2023 they owned US$1.1382 trillion, well more than the US$ 816.3 billion owned on the Chinese mainland and US$ 1.050 trillion if one includes Hong Kong. No wonder nearly half of all outstanding Japanese government debt has had to be bought by the Bank of Japan.
Does anybody believe that we are sitting at the cusp of a tsunami of Japanese savings and investment heading back across the Pacific? The underlying prospects for Japan have not changed so it looks as though BoJ governor Ueda has nipped across the negative to positive interest rate line while it is still possible, and surely not by accident, ahead of the uncertainty that might follow a change of administration in Washington.
President Biden is already looking to steal Donald Trump’s isolationist clothing by blocking the acquisition of US Steel by Nippon Steel. Take an ailing business suffering from underinvestment and outdated technology, take an advanced competitor from one of your staunchest allies and most important partners close to your greatest geopolitical rival which has the wherewithal to bring your guys up to speed and put them back on the map, then declare the company to be of strategic importance and block the trade. If Biden wants to accuse Trump of being an isolationist, what the hell is he playing at?
So Japanese rates have crept over the line, but the ongoing QE programmes are not about to be changed. The BoJ has a history of failed gestures. I recall them having in the 1990s once tried to tighten monetary policy against the backdrop of low inflation in order to convey the impression that things were better than they were and in the hope of encouraging people to go out and spend before prices began to rise again. It failed and did nothing other than to make matters worse. Once again, the message is big but the policy shift is small. Foreign exchange markets have that clocked and dollar/yen has gone nowhere. It might have put on its shoes, but it has not yet done up the laces.
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