Credit: Shutterstock photoMarshall Gittler, Head of Investment research, FXPRIMUS.com
It’s been said that “the definition of insanity is doing the same thing over and over and expecting different results.” In that case, what can we say about the Japanese government? Since 1985 there have been at least 11 large supplementary budgets exceeding JPY 5tn. That’s about one every three years. Result? Economic stagnation and continued deflation. Nonetheless, they are said to be considering increasing the size of this year’s stimulus package from the initially discussed huge JPY 10tn to a enormous JPY 20tn.
Let’s admit the truth: Japan has been struggling with the same problems for many years now and has just tried the same solution of monetary and fiscal stimulus, but without success. They have tried more and more intensive versions of monetary stimulus and more and more fiscal stimulus, but things haven’t really changed.
Overnight rates have not gone above 1% since 1995 and indeed have been close to zero for most of the time since 1999 (except for 2007/08). Now yields are negative out to 15 years. At the same time, the government has run a primary budget deficit (before interest costs) since 1993 and currently has to pay for about half its spending by issuing bonds. The accumulated budget deficit is the largest in the world and there seems to be no plans to get this under control.
Has all of this stimulus helped? It’s possible that things would have been worse without it – moderate deflation might have been intensive deflation, economic stagnation could have been depression. The country does indeed have one intractable economic problem: the household sector and corporate sector both run surpluses.
That means if the government doesn’t run a large deficit, then the imbalances in the economy will have to right themselves out another way. Probably the savings/investment imbalance would have caused the current account surplus to rise further and the yen to appreciate more, which might have dampened economic activity even further.
Maybe...just maybe...it’s time to consider something different? Ms. Eiko Shinotsuka, the only real radical I can remember on the Bank of Japan Policy Board, said way back in Feb. 2000 that she thought the Bank should terminate the zero interest rate policy (ZIRP), for two reasons.
The first reason was that she thought the deflationary period was coming to an end, as she expected a recovery in business fixed investment to lead to a self-sustaining recovery in private demand. That was clearly wrong, as business fixed investment didn’t really start a sustained uptrend until Q3 2002, and never was the driving force of a self-sustaining recovery in private demand.
The second reason though is still worth considering today: what she called “the intensification of ZIRP’s adverse effects.” She said: “There has been a distortion in income distribution; this has negatively affected especially the household sector, which is being denied interest income it would have otherwise earned. Structural reform is being delayed; too much easing of the pain of structural reform is producing unintended effects. Market participants' risk awareness is being diluted. And institutional investors, such as life insurance companies and pension funds, are facing difficulty in finding good investment opportunities.”
It’s clear that those adverse effects have only intensified since then, not just in Japan but globally. The household sector is everywhere being denied interest income. Voters balk at being “bailed in” to rescue banks, as happened in Cyprus, but in fact savers everywhere are being “bailed in” to rescue governments and other over-extended borrowers by having the real value of their savings eroded.
Structural reform has certainly been delayed: not only in Japan, where PM Abe’s “third arrow” of structural reform has fallen far short of its target, but also in the Eurozone, where the ECB’s purchase of government bonds as part of its QE program has enabled governments to put off necessary reforms.
Market participants’ risk awareness? “Buy the dip” is the new investing mantra. And when the yield curve is negative out to 9 years, as it is in Germany, or 30 years, as in Switzerland, those of us in the FX market can only be grateful that we are not asset managers trying to match liabilities at a life insurance company.
The prescient Ms. Shinotsuka identified these adverse effects 16 years ago, yet these same policies have since become standard at central banks around the world, thereby causing these same effects to spread around the world, too.
In short, as the Japanese government considers increasing its supplementary budget once again, maybe the authorities should consider something radically different. They should realize by now that monetary and fiscal policy can’t get them out of their problems, and try something else. One place to start might be to figure out why the corporate sector runs a surplus and do something about that, perhaps harnessing it to offset the government deficit.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
