34: Japan Just Can't Catch a Break

two week vacation in Europe, joins US in Washington. Ako is on leave. Tory, welcome back, Thank you, thank you. I was in France, Switzerland and Italy, but I worked for it because I ran a marathon at the very beginning. You want attempted to go to Japan. No, not this time around. Well, poor Japan. It can be forgiven for feeling a bit beaten last weekend attending the spring meetings

of the International Monetary Fund and G twenty. That's the Group of twenty, the ministers and central bankers of the world's largest economies. It's finance minister one little sympathy for the pain being caused by a strong a end. But it wasn't supposed to be that way. Let's take a step back. While these days China gets all the buzz, there was a time not too long ago when serious people thought Japan's economy was going to swallow the world.

It was once the world's second largest economy by a long way, and it still matters as the world's third largest economy, a major American ally, and an anchor of security in the post World War two Pacific. That's right, But ever since a stock and property market bubble burst in the early nineties, authorities there have been experimenting with

ultra low interest rates, bond purchases, and fiscal expansion. The Bank of Japan was actually a pioneer of quantitative easing, subsequently adopted by most major economies, including here in the US, and yet it's stuck or worse. A bold effort a reflation by Prime Minister Shinzo Arbe and Bank of Japan Governor Hirohiko Kuroda got off to a promising start, but

appears to installed. Not only is the yen doing the opposite of what it should be doing, but the I M F forecast the economy will probably shrink this year. Thanks for nothing. Well, let's let's unpack that for just a second. So we're saying that the yen is doing the opposite of what it should be doing. So the economy isn't doing great, it's struggling, and yet the yen is strengthening. Is that right? Yes, and it's strengthening even though they really throw in the kitchen sink at the

economy as far as monetary policy is concerned. So joining us on the phone to help us make some to all this from Tokyo after just returning from the I m F meetings is Bloomberg story. Fudioka, So you travel a lot with the finance minister, and you're actually in d C with him this weekend. How's your how's your jet lag hanging up? Oh? But you know it's getting better? Good? Thanks, thanks for having me today. Of course, thanks for joining us.

So um so this did not sound It was a happy meeting here in Washington with all these finance ministers. And at this point, several years into abonomics and karudonomics, the place was supposed to be flying. Japan was supposed to be doing a lot better. What gives? Yeah, I mean that's right, hasn't had much good news decently have to give you an idea. Japan economy contracted in the final and to see a good chance of another contractionary

too much. At the same as, they pointed out that ye strengthening deversing weakening trends in the past few years since I mister I became too power. I mean, that's a big contept for Polihemic because overall it is squeezes the Javanese corporate profit, makes them cautious of our investment and raising wages, so that stopping the economic badge cycle.

So that's why Javanese finance Miss tartle as all pride hard to get some sympathy from G twenty Last weekend, he told at the G twenty diner that disorder or accessible currency movements und terble and at one or one meeting with the historiary secondary Jack Clu, he said he has a deep concert with recently appreciation and repeated this is the currency movements are und leveled. It's unusual for Japanese finance mister to express his concert on follign exchange

in markets in this excess way. But what happened was within twenty four hours after as we spoke to reporters, Jack Crew said, Japanese to proce some secret demand and markets are moving alday despite PFC engaged. That indicated a create difference with asshole, and that's investors took it as a big non overroo the US for Japan interming in markets even if it wants it a frustrating moment for

Japanese officials. Clearly, what about the decline in oil toro That was supposed to be a good thing, but that really hurt the efforts to reflect the economy. You know, I think to providing some support to consumers epifies those in living in the la areas. So oil placed troup has pushed down the lid of infreation. So unlike other major nations, the Japan has experienced deecreation for about sixty years, So the program decreation has a big crisp potaban company's

pussholes to keep their decreation in mindset. I want to also put put this in context a little bit. So when we're talking about the strengthening in UM, if we're comparing it to the darts up just about ten percent this year, and that's the second most of most of the major currencies in the world. That seems like quite a significant move. But how does that compare two years past up until this year? I think since we started a Yeah, we can the twenty patents of saty patents,

so so this could be just some unwinding of that. Then, yeah, that's true, that's true. But if you think it was weird, Javan started it, but it went absolutely seventy five point thirty five and the companies are really struggling with the level that has improved. But companies, it's better for now. Companies have a weekend yet and life in Japan is still pretty comfortable. People still make a good living. There's

no sense of crisis. Does any of it matter in the short term, yes, I mean like that's probably why we haven't had major changes in the compolicies. But in the long term that's got via concer and who knows what's going to happen with if I continues to have at the creature and why we have one of the biggest system by that, well, it's been great. You could join us, so soon after arriving home get some they do so after a word from our sponsor, will be

back with our next guest. This episode of Bloomberg Benchmark is sponsored by HSBC, with over eight thousand global relationship managers on the ground in over sixty countries. HSBC mixture Global Ambition their local business HSBC Well, our next guest is also no stranger to Japan or Japanese economics. Jeff Young. You've been following the country for a couple of decades, including a stint as chief economist at City Group in Tokyo. You now have your own firm called Deep Macro. It's

great you could join us. You know, listening to Taru makes me wonder whether this current condition is really just normal for Japan and the decades after World War Two that saw the spectacular growth work light with the aberration. Yeah,

I think that there's something to be said for that. Um. Right after World War Two there was an enormous amount of reconstruction that had to happen UM, an enormous amount of the labor force that had to be brought into the modern economy, and an enormous catch up that had to be done with the United States and the other advanced countries. Japan pretty much reached that point. Uh some you know, in the late nineteen eighties, the early nineties UM and since then it's been dealing with problems like

the demographic issues. And for a country undergoing Japan's demographic shifts, I think this really does raise a question how fast can you expect to grow? Right? But many other countries are also facing huge demographic issues that will catch up with them sooner or later. And yet Japan really does seem to be mired in this environment where they can't get inflation to pick up no matter what they do, where the economy is starting to struggle and is obviously

creating concern out there. I mean, is this something unique to Japan though, that that no matter what they try to do, they just can't get it going like they want. Well, I think that there's a couple of things to point out.

You're entirely correct that there are many countries who have similar demographics at least looking forward, but Japan was you know, they have, they aged much faster than anybody else if you look at things like the old age dependency ratio, if you look at things like the change of the working age population, Japan sort of hit the skids in terms of UM demographics being favorable for growth you know,

quite a bit before. But I think that what you're pointing to if if um, you know, I would extent that is that you know, countries like Korea, UM, you know, they have you know, a somewhat japan Esque future to look at, at least in terms of whether demographics are going.

The other thing that I think has something to do with the deflation, although it's been an awful long time h is Japan also had its financial crisis UM, a big one UM and it in the ninety nineties, and the slow response to that UM the near collapse of the banking system once twice, three times UH. The impact that that has had throughout the economy seems to be

very very deep rooted. UM. Difficult to quantify, especially given that the crisis has been over for an awful long time, but it does seem to have had a long term negative effect on sentiment that officials, including Governor Kuroda, have continuously pointed out that they're really trying their best to undo. And I think that maybe the banking crisis one of the root causes of that. The demographic issues have been

pretty well documented. I mean, if you flip through late night TV and a hotel in Tokyo, you'll come across lots of ads for adult diapers, an adult daycare. Is there something beyond that? Let's talk about the term kiretsu yes UM. The Japanese industrial groupings, usually with a bank UM at the center. UM. They'd have UM generally speaking,

you know, manufacturing companies and insurance company UM. A lot of different UM companies in an industrial grouping UH, and a lot of the business would take place within those groups UM. I don't think that they've had such a

role in the economy UM recently. One thing that really has been noticeable during the period of deflation or very close to deflation, is the relationship between small firms and arge firms, where there has been just a continuing grinding pressure from the large firms towards their smaller suppliers to please cut your prices. We're not going to pay you

more this year. In fact, we're going to pay you a little bit less, and that has had a very UH that has had a pretty strong deflationary impact of the economy because the small businesses employ a lot of people, so if they're receiving every year a little bit less for the products they produce, that has meant that every year they've been having to pay their workers a little

bit less. UH. And that has I think been one of the structural forces if you look at the how the corporate sector is arranged, that has contributed to this undertow let's say, of deflation and also contributing to that.

Just kind of bringing it back to the conversation that we had earlier at the top of the show, is the strengthening in And you know, at the I m F meetings Japan really didn't get a lot of sympathy UM Trosury Secretary Jack lou here in the US really urged them to just kind of ride this out, to not engage in any intervention to weaken their currency. Is I'm curious about this is yen intervention like a term that is out there? If not, it totally should be

and I should trade market. I hadn't heard it. Actually, I'm I have not either, and it's kind of surprising. That's a good one. UM. I think Look, the G twenty UM have a longstanding UH policy against intervention unless markets are disoriented disorderly UM. And I think that they're saying, look, UM, the yen has appreciated but it hasn't really appreciated in a disorderly fashion yet. I think that there's a general unease globally also with this whole phenomenon of negative interest

rates UM. Japan wasn't the first to go negative. You know, they're probably the first towards zero UM long ago UM, so Japan can certainly say, look, we're not unique there.

But I do think that when they rather surprisingly cut their part of their indust rate, it's only very small portion of the whole structure, but some of the indust rates below zero in January this year, that did seem to represent a broadening um of the whole negative industrate phenomenon from Europe, where several central banks maintain some form of negative rates, now Japan has it. You have some people talking about it in the US, but I think

that that's just uncharted territory so UM. On the monetary side, there does seem to be a sense of let's not do anything dramatic and let's try to see if what China is doing in terms of stimulating the economy of fiscal policy um UM, tightening up regulations on capital outflows a little bit more. Maybe that's enough to sort of stabilize the global industrial cycle and to stabilize the emerging markets, which were really the locate the locus of the weakness

last year. And there's also been some talk of helicopter money. Uh in Japan. Would you walk us through that idea a little bit? Sure? Um, it really is basically a tax cut or fiscal spending that is financed by the central bank rather than the government issuing debt. So another one of these very unorthodox measures. Yes, I think so, And you could argue that Japan has implicitly done this before. UM. But the I think the arguments that it might be

bigger or even more radically. If the Bank of Japan is buying the bonds that would be issued in order to finance this fiscal expansion, maybe they would just stuff them in the drawer and not ask to be repaid

when um they come to This would be a true monetization. UM. I don't think that Japan is there, but there has been some talk of that, and I think that there's a very important distinction between the circumstances in which perhaps helicopter money is appropriate and the circumstances that the Japan faces right now. You know, Jeff and Tory. It feels like there's a real element of tragedy to this. You

have these two guys, Are and Corona. They've done a lot since they've been in office, and yet it seems like they're swimming against these long term forces and in the case of oil, a bit of bad luck that are just thwarting them. I mean, it does seem like a tragedy. Really, can two men really make a difference? This would suggest not well. I think that there are a couple of the couple of big forces that we've

spoken about. The first is demographics. The second would be just the very large level of public debt, which you know, I would I would argue that your colleague Tour referred to indirectly when he talked about the consumption tax, Like the reason why the Ministry of Finance has consistently wanted to hike this tax is to raise revenue, to begin to slow the debt, the pace of debt accumulation, and maybe to reduce it eventually. And this is essentially just

a sales tax. That's true. But the problem is that Japan has so much debt um as a result of these past fiscal stimulus packages, as a result of just the weakness of the economy, um that the public is now expecting these tax hikes pretty regularly. And so if you have really poor demographics and you have, um a public that expects tax hikes to pay for those, it's not clear that the countercyclical measures that the Prime Minister and the Governor of the Central Bank have been implementing

are really enough to change the tide. You can certainly affect growth for a little while, which is which has happened, but you tend to go back into that sort of negative equilibrium of a very very slow decline. I thought we'd closed with a bit of historical perspective. You know, the way people talked about Japan back in the late eighties in the early nineties, there was a real sense that was going to swallow the world. Everyone was struggling

to adopt Japanese decision making practices. No c suite was complete without books lying around called things like oh, I don't know the Toyota way or a japan that can say no. It feels a little embarrassing in retrospect. Should we have known better? And is there another Asian country we're making the same mistake about? Well? I think I know where you're going there, and I think that we

may indeed be making that mistake. UM. I would just say is from my experience as an economist that it's very difficult to separate out the micro foundations of success and failure versus the macro ones. Um. Everything that you just mentioned were uh, micro economic strengths of Japan, many of which they still have. And as you pointed out, you know, there are some very good firms. It's a great place to live now, especially given that it's not

as expensive as it used to be. But if you have too much debt um and if you have a banking crisis, um, and then you compound that with the demographics, the best corporate sector in the world is going to have trouble growing. And with respect to China, perhaps that question is becoming a legitimate one. Clearly, there are a lot of good Chinese companies. There's obviously a very vibrant UH. I don't know what the right word is, acquisitive, capitalistic ethic,

real growth ethic out there. But if China continues to accumulate debt at the rate that it has been um, will that become as big of a constraint on growth as it has in Japan. I think it's a macroeconomy. I'd have to say it might well. Jeff, we could talk about this for quite a while, but we've got to wrap it up. Thanks for sharing your perspective with us, and thanks to all of you for listening to Bloomberg Benchmark.

We'll be back next week. Until then, you can find us on the Bloomberg terminal and Bloomberg dot com, as well as iTunes, pocket Cast, Stitcher, and Google Play. While you're there, take a minute to rape and review the show so more listeners can find us, and feel free to let us know what you thought of the show. As always, we are available and active on Twitter. I'm at Tory Stillwell and Dan is at danielmas d C. Jeff, do you have a Twitter? Yes, I'm looking at it

right now on Jeff's business card. It's at Deep Macro. We'll see you next week. This episode of Bloomberg Benchmark was sponsored by HSBC. With HSBC, you have up to a minute visibility and control of your global cash positions so your business can move at the speed of opportunity. H S b C