Despite the fact that John Snow was cheerfully informing us earlier this week that 'deflation is a monetary phenomenon', some inveterate doubters remain unconvinced. Yours truly for one: I think this view is nonesense. Fortunately from time to time more signs of intelligent life appear on the planet's surface. The author of this piece is a Straits Times columnist columnist who goes by the name of Eddie Lee. Now I have no idea who Eddie Lee is, or what he thinks about most matters that affect our civilization. But one thing I do know, he has learnt something from what is currently going off in Japan. And another thing I know is that he must have read something from me somewhere along the line. On the credit-driven expansions, I fear he may have got only part of the full force of the point. There is a double hit. In the first place there are proportionately less people to borrow, but in the second since the growth outlook is reduced (or even negative on the deflation scenario) the future income stream on which they might borrow is also down, so bringing down the whole 'equilibrium' path, and so bringing down expectations in a way which may mean that it's more than just the circle that gets vicious. Here the non-linearities are everything. In any event, from one 'Eddie' to another, thanks mate.
The Japanese government is widely expected to propose an array of measures to bolster the country's stock market soon. Japanese banks' massive stockholdings leave them extremely vulnerable to stock price falls. The price support operation is viewed as a necessary step to prevent a collapse. Yet, hardly anybody is raising an eyebrow. As a regional policy adviser declared recently: 'I don't think the rest of Asia cares much about Japan any more, does it?' It's a sentiment shared by many in Asia.Who can blame this display of apathy? The country has failed to be an engine of growth for so long that nobody's holding his breath. But for anyone thinking about what the future may look like, you can't ignore Japan. The loss of the Japanese engine of growth has had a deeper impact on the rest of Asia than generally appreciated - not just what might have been, but what can be. And it's the future that is the concern, for Japan may be a foretaste of something that might become a more universal problem.
Japan is the first case of a modern economy afflicted by deflation. The typical response to this situation is to say that Japan is unique; the rest of the world 'is not Japan'. How the Japanese state of affairs came to pass is explained by an unusual combination - protected markets, gross inefficiency and a paralytic government that led to a dysfunctional banking system. These factors strangled the production processes and sank the economy. In one of the first books to predict the downfall of the Japanese economy back in 1992, Japan: The Coming Collapse, Brian Reading described the Japanese economic system not as 'capitalist with warts' but 'communist with beauty spots'. It was doomed to fail because the keiretsu model was designed to eliminate competition for the benefit of powerful corporate interests.
The solution? Most analysts call for reforms to deregulate the economy, as this is cited as the main cause of the malaise. But this argument is not entirely convincing. An economy suffering from inefficiency should be punished by a low rate of growth rather than the protracted recession Japan suffered for much of the past decade. And inflation, rather than deflation, should be the symptom. It isn't that the banks are unable to lend either. Mr Mitsuru Machida, managing director of the Mizuho Financial Group, says the problem is a lack of borrowers: 'Deposit levels have fallen, but our loan assets have fallen even more, especially among corporate clients - we have more cash at hand.'
Increasingly, economists believe that the more pressing problem lies with a lack of demand. Private consumption expenditure in Japan has been falling every year since 1997. It is, indeed, an unusual situation. What makes this problem particularly disturbing is you'd think getting spending going again in an economy is not a difficult task. But Japan hasn't been able to do this. A possible reason lies in the fact that Japan has the oldest population on Earth, with a median age of 41.3. The government estimates that in three years, the population size will actually start to decline. Japan could be the chilling example of what happens when an ageing society meets an economic recession: You can't shake off the slump.
Take the typical case of the median Japanese man. He's probably still paying a mortgage on his apartment whose value has fallen by 40 per cent in the past decade. However, as he had to accept pay cuts to keep his job - the average monthly salary for the Japanese employee fell during the past two years - his mortgage burden has increased. He has one child who is about to go to college, but for the past decade, his savings in the bank earned next to nothing in interest. Given this prospect, he has to save heavily to make provisions for the future. Even retirees like Mr Tomiya Isshiki, 67, won't dare splurge. He's relatively prosperous with a house in the Tokyo suburbs. He's paid off his mortgage and receives a monthly pension. But he says, as quoted in the Asian Wall Street Journal: 'We are all worried about the future, so we have to save.' Economist Edward Hugh points out that reviving demand in an ageing society is an uphill task. For while young societies can face credit-driven expansions, old societies obviously cannot. If Japan is providing a foretaste of the future, then Europe could be next in line. In particular, Italy, Switzerland and Germany have populations with a median age of around 40 years. In the past two years, these three countries averaged just 0.5 per cent growth with rapidly falling inflation rates. So far, little attention has been paid to this predicament because few think it's a problem. That may be slowly changing. Mr Naohiro Yashiro, president of the Japan Centre for Economic Research, is a man concerned about his country's ageing population. He notes: 'The ageing society is not only a matter of the future, but a matter of the present.'
Source: The Straits Times
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