EVEN as financial markets greet the European Central Bank decision to embark on vast asset purchases with rapture, the efficacy of such unconventional monetary policies in Japan grows ever more questionable, and the gap between the impact on asset prices and the real economy becomes ever more pronounced.
It should take a brave investor to buy Japanese government bonds today, with yields on five-year bonds at 0.03pc and the 10-year at 0.24pc. It should take an even braver foreign investor to do so, given the weak yen.
Only those who are index investors would bother, since Japanese government bonds weigh so heavily in sovereign debt indices precisely because the issuance has been so heavy. But that does not matter. Demand from the Bank of Japan and other government-related institutions keeps prices artificially high and yields artificially low.
The cost of capital in Japan today is virtually nothing. Yet there is ever less evidence that low interest rates and a laughably low cost of capital are having any impact at all on investment and spending in Japan. Neither corporate Japan nor household Japan appears inclined to take advantage of easy financial conditions. In November, machinery orders dropped 10.4pc after an almost 3pc fall in October, figures that were weaker than expected. That has led to fears that both capital spending and the export of capital goods, which has always been at the heart of the Japanese export machine, will prove soft once again.
Indeed, foreign machinery orders fell almost 19pc over the past three months of 2014, according to JPMorgan economists. Manufacturing PMI has also been flat.
Neither corporate Japan nor household Japan appears inclined to take advantage
of easy financial conditions
Japan is well on the way to becoming the face of stagnation in the world today, though in some ways stagnation is not a concept that makes sense in a Japanese context. That is because Japan’s growth model has never been about robust consumer demand, while the definition of stagnation includes both insufficient domestic demand and slack output compared with potential capacity.
Japan thrived in the past, not because it had a population of happy consumers with the shop-or-die mentality so prevalent in the US, but because it was the original export-led growth model — and it worked beautifully for a while.
Its prosperity has always been based on low wages and a low return on savings in order to subsidise Japanese companies as they sell products at lower prices abroad than they do at home. In exchange for a relatively small share in the profits of their employers, though, workers were promised lifetime job security — at least at the most elite Japanese groups. But the export model is no longer working for Japan.
Today, the country has few of the competitive advantages that give it an edge at a time when China has more economies of scale — and is rapidly moving up the value-added chain, and increasing its exports in spite of the relative strength of its currency. The hope in an ageing population means fewer workers and therefore higher salaries is likely to prove vain. Japan’s ageing workers lack the skills for a digital world and indeed for a globalised world.
Rather than trying to nourish domestic demand, reliance only on the first arrow of a cheap yen and low rates (painful for savers — especially for the elderly) and a tax policy that favours corporate Japan at the expense of its households means private domestic demand will not come back soon. Even the modest fiscal stimulus that was the government’s second arrow has little multiplier effect and will be offset by the fact taxes will go higher in the future.
As the yen falls, Japanese tourists abroad have become an endangered species. Meanwhile, from the ski resorts of Hokkaido to Tokyo department stores, Chinese is becoming heard more frequently. The beneficiaries of current policies are foreign tourists, not the Japanese themselves.
Stagnation is not inevitable, though it is harder to avoid given the demographics of Japan. But the Bank of Japan’s policies will do little to reverse that stagnation. Moreover, buying shares because the government is allocating money to price support operations is not a terrific idea. Fundamental arguments are a better reason to invest than the passing and artificial support of government institutions. After all, they have deep but not unlimited pockets.
Published in Dawn, Economic & Business, February 2nd, 2015
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