Opinion

Felix Salmon

The problem of Japan’s household savings

By Felix Salmon
August 2, 2012

Almost two years ago, in September 2010, the Japanese currency reached an all-time high of just 83 yen to the dollar. The Bank of Japan, shocked into action, brought out the big guns: a massive intervention in the fx market, which immediately sent the currency down more than 3%. And I responded with a blog post headlined “Why Japan’s FX intervention might actually work”: the intervention was unsterilized, which meant that the Bank of Japan was essentially printing money. If a central bank prints enough money, the currency will, eventually, fall.

Of course, that didn’t happen. A commenter, gpowell, looked into the details of what was going on and discovered that the intervention was only technically unsterilized: in reality, the Ministry of Finance ended up issuing new debt within days to repay the central bank. And so the inevitable happened, and the yen kept on strengthening. It’s now hitting new all-time highs around 78 yen to the dollar: the Japanese wish it were back at the 83 level which seemed so unacceptable two years ago. The Bank of Japan’s actions are barely making a dent in deflation, let alone weakening the yen.

Now Martin Fackler has a good piece on the psychology and politics behind the central bank’s actions. The politics are simple: Japan’s politically-powerful elder generation is living on fixed incomes and loves deflation and cheap imports. But it’s the psychology which fascinates me.

Critics say the central bank’s entrenched bureaucrats have resisted doing something similar in recent years out of an outdated fear of rekindling the rampant inflation in the value of real estate and other assets of the 1980s bubble economy. But the bank argues that it makes little sense to intervene without longer-range economic fixes, like deregulating protected domestic industries to spur competition.

The thing which jumps out at me here is the central bank’s perceived fear, not of price inflation (which they actually want), but rather of asset price inflation. In the US, everybody’s asking what the Fed can do to support home prices; in Japan, by contrast, people are genuinely worried that central bank actions might make houses more expensive.

One of the big differences is that Japan is a nation of bond investors, while the US is a nation of stock investors. In the US, the daily gyrations of the stock market are reported in every newspaper and on every newscast, nearly always in a context of “rising prices good, falling prices bad”. Americans feel personally invested, quite literally, in the fortunes of the stock market, and love to cheer it on from the sidelines.

Bond investors, by contrast, are a very different breed. They make no money when stocks go up; they just lose money when there’s inflation. And if stocks go up — which would happen, if the central bank started printing money, causing the yen to fall and inflation to rise — Mrs Watanabe, the apocryphal Japanese bond investor, would not be happy.

It seems to me that what Japan really needs is some kind of massive debt-to-equity conversion, which would help to align incentives a lot more. I have no idea how such a thing could be done. But it looks a bit as though there are actually two ways that debt can cripple an economy. If it gets big, then that eventually weighs on the debtor sovereign, as we saw most spectacularly in Greece. But it can also cause unhelpful incentives among the creditors, too, if the creditors are national households. They should be excited about growth. But all too often, they end up getting excited about deflation.

Comments
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“if the creditors are national households. They should be excited about growth. But all too often, they end up getting excited about deflation.”

That sounds an awful lot like the German creditor.

Posted by stheophil | Report as abusive
 

Issuing inflation-linked or foreign-currency denominated debt would presumably help, though those would probably themselves carry political costs, not least insofar as they might signal the possible intention of inflating later.

Posted by dWj | Report as abusive
 

What’s wrong with slow growth and a simplified life? Manic activity bores me.

Posted by urownexperience | Report as abusive
 

Re: “the US is a nation of stock investors. In the US, the daily gyrations of the stock market are reported in every newspaper and on every newscast…”

I’ve never understood why every U.S. newscast must report the daily motion of the Dow Jones, the S&P 500 *AND* the NASDAQ* and sometimes even the Russel 2000, but an investor has to go out of their way to find out what happened to the Barclays Capital U.S Aggregate Bond Index.

Posted by Strych09 | Report as abusive
 

A debt-to-equity conversion?

Political economy prescriptions should at least incorporate some sense of demographics. For example, Daniel Patrick Moynihan once likened the societal progress of U.S. baby-boomers to a snake eating an elephant and this informed his decisions.

Think about how much U.S. investment preferences, priorities, and politics have morphed over the past 50 years as our society has digested this elephant.

Japan’s demographics are currently diamond-shaped and heading rapidly towards top-heavy. That means that Japan has an overwhelming number of older people and that number is growing every day. (Here is an old, but quick view of population v. age group trends in Japan published by the Japanese themselves: http://warp.ndl.go.jp/info:ndljp/pid/283 520/www.stat.go.jp/english/data/handbook  /img/fig2_3.gif)

So, Japan is a nation of bond holders because it is a nation of elders. And just as U.S. financial advisors suggest to clients that as they age, they should lighten up on their equity allocation in favor of more fixed income allocations, the aging Japanese population has done that same, rational thing and will continue to do so far into the future. (And the Nikkei’s collapse from nearly 39,000 in 1989 to less than 10,000 by the end of the ‘90s certainly helped drive home the downside risk of ignoring that asset allocation advice.)

Add to that the deep respect that elders are accorded in Japanese society, and you can begin to see that this Japanese problem of political economy is as intractable as they come.

Posted by AABender1 | Report as abusive
 

A debt-to-equity conversion?

Political economy prescriptions should at least incorporate some sense of demographics. For example, Daniel Patrick Moynihan once likened the societal progress of U.S. baby-boomers to a snake eating an elephant and this informed his decisions.

Think about how much U.S. investment preferences, priorities, and politics have morphed over the past 50 years as our society has digested this elephant.

Japan’s demographics are currently diamond-shaped and heading rapidly towards top-heavy. That means that Japan has an overwhelming number of older people and that number is growing every day. (Here is an old, but quick view of population v. age group trends in Japan published by the Japanese themselves: http://warp.ndl.go.jp/info:ndljp/pid/283 520/www.stat.go.jp/english/data/handbook  /img/fig2_3.gif)

So, Japan is a nation of bond holders because it is a nation of elders. And just as U.S. financial advisors suggest to clients that as they age, they should lighten up on their equity allocation in favor of more fixed income allocations, the aging Japanese population has done that same, rational thing and will continue to do so far into the future. (And the Nikkei’s collapse from nearly 39,000 in 1989 to less than 10,000 by the end of the ‘90s certainly helped drive home the downside risk of ignoring that asset allocation advice.)

Add to that the deep respect that elders are accorded in Japanese society, and you can begin to see that this Japanese problem of political economy is as intractable as they come.

Posted by AABender1 | Report as abusive
 

“It’s now hitting new all-time highs around 78 yen to the dollar”

Actually, the high was 75.82 in October 2011, which triggered another massive intervention that was at least briefly successful earlier this year.

Posted by loudnotes | Report as abusive
 

“But it’s the psychology which fascinates me.” (FS)

Me too – your psychology, FS, as reflected in this –

“In the US, everybody’s asking what the Fed can do to support home prices ….”

“Everybody” isn’t asking that, Sir – but you are, and I take it the one then becomes the other, right lad? The Fed created the bubble in house prices, didn’t it? Were you grousing about that while it was happening? I don’t remember it, if you were. Now that the bubble has revealed itself to be what it is/was, you have become part of the Greenspan, Krugman, Angelo Mozilo chorus –

“Bubble Without End – Amen.”

Posted by MrRFox | Report as abusive
 

Actually, the yen went above 79 to the dollar in 1995 as well. Gotta check the history better Felix.

Posted by JapanFan | Report as abusive
 

GPIF started buying emerging markets stock, so Mrs Watanabe will have money in something other then bonds.
http://www.bloomberg.com/news/2012-07-25  /world-s-biggest-pension-fund-sells-jgb s-to-cover-payouts.html

Posted by traian | Report as abusive
 

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