The problem of Japan’s household savings
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Critics say the central bank’s entrenched bureaucrats have resisted doing something similar in recent years out of an outdated fear of rekindling the rampant inflation in the value of real estate and other assets of the 1980s bubble economy.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.