We are told that the war in the Gulf is over. I don't believe that. Yesterday's poll on this issue here suggested that you don't believe that. But what I do know is that another war is starting.
This is the war by the world's Central Banks on the world economy. I noted that the European Central Bank started this process by raising its base rate last week, and now the Japanese central bank is heading in the same direction, as the FT notes this morning:
As that article makes clear, not only is the rate rising, but the Japanese central bank is planning to end its quantitative easing programme, which has delivered government debt-to-GDP ratios well over 200% in that country, without any apparent harm to the economy arising.
Why would it want to do that? There are three reasons..
First, it wants to support rising interest rates at cost to the people of Japan.
Second, it wishes to withdraw liquidity from the Japanese economy, at cost to the people of Japan.
Third, it must want to shrink the Japanese economy.
Those will be the consequences of the Japanese government's actions, and I am going to presume that it is rational, and knows what it is doing, and therefore desires these outcomes.
Why, in a world of massive uncertainty, it would wish to do this is hard to work out, but what we do know is that Japan now has a government that models itself on Margaret Thatcher, whose primary goal during her period in government was to increase inequality in the UK. I think we can safely assume that is the object of the Japanese government, and if it is, that they are going the right way about it.
In other words, this is a government that has set out to be at war with its own people.
Unfortunately, I am expecting others to follow.
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Might it be that the Japanese government has a submerged policy of increasing the wealth of rentiers?
I wonder what Richard Werner has to say about that (The Princes of the Yen)?
Has there been yet another buying spree from America into Japan? Might it be international pressure? Or domestically grown stupidity searching for wealth out of bubbles (bad idea)?
Looking at the devastation now in Lebanon, 4,000 dead – it seems to me that reparations from Israel would be fair but unlikely – and that is not on. Which also means that a peace cannot really last.
“Rates at 1% for first time since 1995” says the headline. A lot has (and has not happened) since 1995….. much of it instructive, I think.
Prices in Japan (in yen terms) are about 10% higher; in the UK, prices (in sterling) are 110% higher. GBPJPY was 150 in 1995; today it is 210 – ie. sterling is stronger.
In 1995 (the year I left Japan) a beer in Tokyo cost £4 but less than £2 in London; today, a beer in Tokyo costs £3 but £7 in London. This massive (relative) deflation is what prompted QE in Japan long before we ever thought of it.
And, if you thought QE in the UK was big then in Japan, it was huge – peaking at £4trn (versus less than £1trn in the UK). For years, traders tried to short Japan Government bonds on the basis that it would all end in massive inflation….. and it didn’t. What DID happen is a decline in the currency… but this adjustment has not proved particularly damaging for Japan.
Japan is living proof that high debt levels do not mean a visit “cap in hand” to the IMF and that adjustment through FX depreciation is not necessarily a bad thing.
The key driver is demographics. Japan’s population is aging fast and there is very little immigration and it appears the UK is heading the same way.
Forgive me a second go…..
Rising Japanese rates along with (politically pressured) falling rates in the US might cause problems for the USD. Japanese insurers and pension funds hold vast amounts of US assets (in particular, US Treasury bonds) and their liabilities are all in JPY. At what point do they repatriate their money? This is, I think a major issue that lies ahead.
And finally, I would not give the BoJ a hard time over raising rates – the BoE is a far better target. First, it’s the absolute level 1% in Japan versus 3.75% (and headed to 4% ??) in the UK. Second, mortgage debt in Japan is half that of the UK and consumer debt is lower. Indeed, higher rates for savers might raise consumption amount the older generation.