Clouds of gloom have been shrouding Japan and its economy for quite some time. The bursting of the asset- inflated economic bubble in the early 1990s, and the failures of banks, insurers and other big corporations later in that decade, has put a huge dent in Japan’s collective self-confidence. That is made all the more painful since it followed the country’s postwar rise from rags to rich “Asian tiger” — prompting both awe and anxiety around the world.
Such days are long gone. After the bubble burst, the nation endured a self-styled “lost decade” that has now turned into two decades mired in a prolonged stagnation that has dampened consumption, wages and — perhaps most importantly — people’s spirit. A study of the factors surrounding all this would seem to aptly fit the disparaging description of economics as “the dismal science.”
Indeed, even rafts of government stimulus measures have failed to reverse the dismal trend or do anything to improve citizens’ lives — despite official assertions that Japan experienced its longest postwar economic boom from 2002 to 2007.
Even more worrisome is the fact that much of the money the government has poured into economic stimulus measures has gone into public-works projects — mostly financed by borrowing from future generations. Consequently, with its national debt currently around ¥900 trillion, nearly double its annual gross domestic product (GDP), Japan is at risk of defaulting at any time. That risk would become even more acute if interest rates — kept close to zero through years of monetary easing by the Bank of Japan — were ever to rise significantly.
As well, adding to the dismal national mood is the fact that Japan’s population is aging fast, so that within 40 years nearly four out of 10 people will be aged 65 or older.
To top it all off, the collapse of U.S.-based investment bank Lehman Brothers in 2008 dealt a sickening blow to much of the capitalist world, and Japan has been in a deflationary spiral ever since.
Where is Japan going?
In an attempt to cast light on these issues, The Japan Times has turned to Noriko Hama, a noted economist and JT columnist, for answers.
Hama, a professor of economics at the Doshisha University Graduate School of Business in Kyoto, has authored more than 20 books on the themes of the Japanese and world economies. She is especially knowledgeable regarding the international financial markets and macroeconomic policies, and has a global outlook enhanced by the many years in the 1990s she spent as a London-based researcher for the Mitsubishi Research Institute, Japan’s leading private-sector think tank.
In her most recent book, “Atarashii Keizaigaku: Gurobaru Shiminshugi no Susume” (“A New Economics: A Guide to Global Citizenship”), which was published in July, she counterintuitively urges Japan’s consumers to think about the severe consequences of hunting for bargains — blasting such behavior as “survival through cannibalism.”
To illustrate what she means by this, Hama points to the work of U.S. fiction writer Stephen King, who in one of his books depicted in horrific detail how a shipwrecked surgeon on a desert island strives to stave off starvation by cutting off parts of his body to eat. The story’s conclusion is obvious, since he cannot sustain himself through cannibalism. Hama argues it is just such a grotesque scenario that is now engulfing deflation-plagued Japan. Hence she states that people who go after unreasonably cheap goods and services will eventually pay a high price in this globalized and interdependent economy, as their behavior will drive down wages and kill jobs.
Hama recently shared her thoughts on how to confront such issues, and many more, in an hourlong interview. The following are excerpts from that exchange.
There is not much optimism among Japanese people these days. China this year overtook Japan’s long-standing position as the world’s second-largest economy, and Japan’s population is falling and aging rapidly. So why is the yen rising against other major currencies? Shouldn’t the strength of a currency reflect the strength of a country’s economy?
As you point out, there seems little inevitability for the yen’s value to rise. So what we are seeing now is not so much the yen’s appreciation but the depreciation of the dollar. The dollar has been too strong and that’s finally being corrected. The yen has emerged as a destination for the money that ran away from the dollar. And that itself is natural, since Japan is the largest creditor in the world — in terms of the volume of savings. In addition, the other alternative for the dollar — the euro — is increasingly becoming insecure. So some of the money is going into the euro, but it is only natural that a large part has been moving to yen.
What is behind the flight from the dollar?
The biggest reason is historical. The dollar should have lost its value a long, long time ago. But because the currency has spread so widely and everyone has dollars, many people have hesitated to see their dollars be devalued. Since the Lehman Brothers shock, however, the U.S. economy has been exposed as being very weak, and people who never wanted to sell their dollars have changed their minds completely. An overwhelming number of people now think that, if they don’t sell their dollars, they might see them turn into worthless pieces of paper. That, I think, is the biggest reason for the dollar’s fall.
How can you tell that the U.S. economy is so weak?
It’s apparent from the way the economy there fails to recover despite massive fiscal spending. The unemployment rate remains high, so consumption does not pick up. The moment the government relaxes its fiscal and monetary stimuli, the economy falters. In other words, the U.S. economy cannot survive without life-support. That’s what the economic indicators have shown recently.
When you say the dollar should have lost its value “a long time ago,” when exactly was that?
I can pinpoint the timing exactly, and that was Aug. 15, 1971.
So long ago?
Yes, because that was the day of the so-called Nixon shock. Until that day, the U.S. dollar could be converted to gold. So anyone who took dollars to the United States could have them exchanged for gold. But on that day, the U.S. declared that it could no longer keep that promise. From that point on, the dollar ceased to be an international, key currency in the world. So from that perspective, the dollar could have fallen to a level that matched the strength of the U.S. economy. But everyone has treated the dollar in the same way they cajoled the emperor in (Hans Christian Andersen’s story) “The Emperor’s New Clothes.”
After the Nixon shock there was the Plaza Accord of 1985 (when representatives of the U.S., Japanese, British, French and German goverments — meeting at the Plaza Hotel in New York — agreed to depreciate the dollar by intervening in currency markets), followed by Black Monday (Oct. 19, 1987, when stock prices plummeted in New York and elsewhere). Then came the Asian currency crisis of the late 1990s and the Lehman Brothers shock of 2008. Through all these events, the dollar has shown us what a dangerous currency it is, losing its clout step by step. And now we are in the final stage of the dollar’s demise.
From 1947 till 1971, the dollar established itself as a key currency, and from Aug. 15, 1971, we have been witnessing a long, long epic drama about the dollar’s end — and we are at the beginning of its climax.
You make it sound like an exciting story.
It is exciting, really. It is a drama of death, so it is tragic for the dollar, but it will settle where it should be.
The Japanese government intervened in the foreign exchange market in September for the first time in 6 1/2 years to stem the yen’s appreciation against the dollar. But the intervention failed and the dollar has plummeted further since, and it is now at around the ¥80 level. Do interventions ever work?
There are several patterns of interventions, but unilateral interventions, frankly speaking, are like prescriptions written by quack doctors.
Why? There are two reasons for that. For one thing, it means (the authorities) are trying to stem the symptoms while turning a blind eye to the roots of the sickness. When you run a temperature, it is because you are trying to cure your cold with the heat. Unilateral interventions are like trying to lower your temperature by administering a pain-killer.
Secondly, this drug has side effects. And there are two aspects of side effects. Like narcotics, once you start using them, you can’t stop; plus every time you do use them, you need a bigger dose.
As well as that, a more severe effect of interventions — especially when you are buying the dollar and selling the yen — is that you are stocking up with more and more of the currency that is losing value. So if the dollar becomes worthless, Japan will lose a huge amount of money. And we already have enough debt to deal with. This could ruin the nation.
The government spent about ¥2 trillion buying dollars in its currency intervention in September, according to Bank of Japan figures. But didn’t the government already hold a lot of dollars from previous interventions?
Yes. Japan’s foreign-currency reserves, up until very recently, were the biggest in the world, because the monetary authorities have intervened in the foreign currency markets here and there. It’s now second in the world, following China, but it still has a big balance — something like $1 trillion. If it all becomes worthless, it would deal a big blow to Japan.
What is even worse is that the ratio of dollars in Japan’s foreign-currency reserves is extremely high compared to those in other countries. China, for example, has bought some euros and has begun to buy gold, but Japan has stocked up on dollars only. This has made Japan vulnerable.
Does that mean that Japan and the United States share a common destiny?
Right. But as we share a common destiny, we should have made more demands on the U.S.
For a long time, Japan has served in the role of “main banker” to the U.S. Main bankers would normally nag their borrowers, even intervening in their borrowers’ management, saying things like, “If you don’t make a profit next year we won’t be able to lend to you anymore.” But Japan has provided money without asking anything in return. If you are the main ally of the U.S., you should be able to tell it things that other countries could never tell it — and be a “persuader based on friendship.” Instead, Japan has been taken advantage of.
You argue that the dollar will eventually fall further — to the level of ¥50 per dollar. But even now, many export-driven manufacturers complain they cannot keep their operations in Japan because the yen is too high and their products’ prices are thus too high overseas. If the dollar falls to ¥50, surely they just couldn’t survive.
Well, that’s not necessarily true. The dollar falling to ¥50 also means that the dollar won’t be needed in the world as much.
Right now, when most Japanese companies export or import their products they receive payments and pay their bills in dollars. But the dollar losing its value by roughly half means the world’s demand for the dollar decreases to half its previous level, too. So if the dollar loses its value, Japanese companies will not use the dollar in trade as much and the impact on Japanese manufacturers would not be so severe; while Japan’s exports will be more and more denominated in yen or yuan, or euro.
When you look back in history, when Great Britain prospered, or before World War II, all trade transactions were made in sterling. Consequently, everyone wanted the pound and anyone wanting trade with Britain needed to use the pound — so demand for the pound rose and everyone was anxious to know how the pound was trading against other currencies. But now, few people care what level the pound is at, unless they are traveling to Britain.
The same thing is happening to the dollar. In the 1960s, the pound sterling was traded at a fixed rate of ¥1,008. Now it’s about ¥120 — nearly one tenth of what it used to be. And yet we haven’t arrived at the end of the world. So the dollar moving from ¥80 to ¥50, it’s no big deal. And the dollar used to be ¥360 and it is now around ¥80, so it will be a less drastic change.
What do you think the next key currency will be — the yuan, the yen, or nothing?
Well, the straightest answer would be “nothing.” When the dollar replaced the pound as the dominant currency, the world economy had not yet globalized. If there is an economy that cannot be rivaled by any others, its currency will be the world’s most in-demand; that’s what a key currency is. The condition for becoming a key currency is simple: Whatever is good for that country is good for the rest of the world. It is only natural that the currency of a dynamic country such as that would be the key currency of the world. But the age of globalization is an age that does not allow there to be such a unilaterally powerful country or economy. That’s because people, products and money travel freely beyond national borders. There is no one place in the world where wealth is concentrated. Everyone is depending on somebody else. We are in a very inter- dependent society. Even China cannot keep operating without a battery of people, products and money from around the world.
China is said to be the world’s factory, but it is not an accurate depiction of what is happening. Rather, the world is making China its factory. An overwhelming majority of factories in China are not Chinese; they are coming from all over the world. This is unprecedented. When Great Britain used to be called “the factory of the world,” the factory had British technologies and they were capitalized by the British. In the postwar period, America was the world’s factory, and Ford was the most symbolic company icon of American technology as the production-line manufacturing invented by Ford increased production volumes dramatically. Then Japan became the world’s factory, with its major players being Toyota, Nissan, Honda, Sony and Panasonic — and they are all Japanese. But China today is different — because the manufacturers there are the likes of General Motors, Ford, Toyota and Volkswagen.
If the dollar’s value falls to the ¥50 level, how will that affect the lifestyle of ordinary Americans?
People will no longer be allowed to borrow and buy as much as they want to. They will be asked to live in line with their incomes. Generally speaking, the size of the U.S. economy will shrink, but if the dollar depreciates to that level then the nature of the economy could change. America could have more room to earn more by exporting more — though whether that would really happen is not certain. This might lead to a new image of Americans as industrious, dedicated workers. They would have to be to survive.
You have taken issue with what you term “Uniqlo-style deflation,” saying that if people are always penny-pinching and hunting for bargains, they — as tens of millions of individuals — might end up ruining the nation’s economy. Yet what can people do to fix the problem, since boycotting Uniqlo or ¥100 shops wouldn’t seem to be a solution in itself?
Well, you don’t have to boycott ¥100 shops, but on an individual level, you can boost local economies by buying from private businesses in your community — not some standard, nationalized chain. Every once in a while, you can choose goods that are not sold at ¥100 shops. Or you could try to dress in something completely different from others. I think you need to think how to protect “diversity” on a local level.
However, if you don’t want to give up a lifestyle revolving around Uniqlo and ¥100 shops, or if you cannot afford to give it up, you can try things that are much more trivial.
For example, when you buy something priced at ¥95, every once in a while you can leave the ¥5 change. Economic activities are closely tied to human activities, so unless people’s lifestyles and their ways of living change, the economy won’t change. If that doesn’t change, the nation and the Earth could be destroyed. So I would urge you to do something different every time you buy stuff at a ¥100 store. (Laugh). And from the businesses’ side, they might not be faulted for driving prices cheaper, but instead they could create a local-level “antideflation fund” and have people donate money into the fund. Many drops make a flood. Trivial things can change the tide. And on a corporate level especially, companies can raise wages.
That would be a great idea!
Right — if it’s in exchange for trying hard to sell more newspaper copies, in your case. (Laugh) Companies can ask their employees to buy more of the company’s products, although that shouldn’t be taken too far. We need more action like that to change the deflationary trend.
You cited a Stephen King story in which a starving shipwrecked surgeon starts eating his own body parts to survive — to a point where he can’t sustain himself. You have made a convincing case that every one of us should become more aware of the dangers of deflation and change our behavior on an individual level.
Right. What the cannibalism economy means is that you are harming your personal finances by pinching pennies. So you have to stop that yourself. Ideally, in this kind of situation, policymakers would step in and rescue us, but unfortunately now their hands are tied due to massive debt. It might be hard to swallow the idea that going after cheaper goods to save money, or reducing wages and salaries to cut costs, alone won’t work. But that’s how severe the situation is right now. That is the kind of paradigm shift required for survival in this “global jungle” age.
There was a recent news report in which a high-profile asset manager predicted that Japan would default on its debt “within two or three years.” You have said in your books that the nation has been able to avert bankruptcy so far because the massive government bond issues are purchased by domestic investors.
So far, yes.
But it is hard to see this could go on forever. How, and in what way, could this delicate balance collapse?
That would be when the world starts to see a rise in long-term interest rates. A rise in long-term interest rates translates into a fall in the prices of Japanese government bonds. If that happens, Japanese investors, especially institutional investors such as banks, life insurers and such, have their responsibility to their shareholders, so they cannot afford to hold on to assets that keep losing their value. So Japan has an inherent risk of defaulting or going bankrupt — if interest rates go up.
Also, the personal savings (that have supported the massive borrowing) have stagnated, so there is little more scope to support government bond issues. But still, the more important factor is interest rates. Japan has been okay because the rates are so low. In a sense, the Japanese government, while stressing that its economy needs to get out of deflation, cannot afford anything but deflation.
Not a day goes by without mention of how Japan’s economy is shrinking, what with the depopulation and the graying of society. What are your views on immigration filling the looming labor-force gap?
If Japan is to take a stance of coexistence and coprosperity in the “global jungle” we see today, immigration will be a natural choice. Once a decision is made on accepting immigrants on a large scale, we need to discuss how to accept or control immigration, and make sure the acceptance of immigrants will not cause social, economic and political problems.
On the other hand, many young people are already having problems finding jobs. Because they cannot secure jobs right out of college, the government is asking businesses to broaden the definition of “fresh graduates” to include those who have graduated within the past three years. Some pundits have argued that it is highly paid but unproductive middle-age workers who have ended up creating a jobless young generation and surging numbers of temporary workers with little job security. Hence they call for a revision of labor laws to change the status quo and make it easier for companies to fire full-time workers, thus enhancing overall labor mobility. What is your stance on this?
I find it strange to claim that you can solve one set of people’s problem by axing other people. Behind the argument that highly-paid middle-age workers should be sacked to create more room to hire young people lurks the intention that young workers are going to be exploited as cheap labor. That would be wrong. We should think seriously how to raise the productivity of workers while protecting workers’ rights and not discounting wages. The problem has come up because we have kept this tradition of hiring fresh graduates en masse and making them rise through the ranks at exactly the same pace. Instead, we should think more about how to mix the young and the older workers and have them work together.
In fact, we used to have a completely different concern. It was called “the 2007 problem” — that being the year when the first of the baby boomers reached retirement age. The concern was that their skills would not be passed on to younger generations and this could lower productivity in the workforce. We used to talk about how so many police officers would be retiring, and how this could lead to security issues. Where has that debate gone, I wonder?
So I think we should focus on better groupings of workers and a vertical use of workers to enhance productivity. Axing one group of workers to save others is not the solution, because if old people are fired, they would be thrown out on the streets, and the government will have to pay costs to take care of them — which would in turn push up the tax burdens of corporations.
You said earlier that immigration will be inevitable in Japan. In Europe, there have been some worrisome developments that could have a bearing on Japan’s future policy on immigration. German Chancellor Angela Merkel said recently that the German policy of pursuing multi- culturalism has “utterly failed.” That was quite a shocking comment. On what basis do you think she made it?
I think it was a mistake for her to make such a radical comment, but it shows how anti-immigrant sentiment has been rising in Germany. Her comment followed a remark (by German President Christian Wulff) stating that Islam has become part of the German culture. So it was probably intended to relax the shock felt (by conservatives) over the president’s remark.
At any rate, it shows how deep the problem is. I guess she made that remark because the economy is suffering and people there are growing suspicious of the administration. Saying multiculturalism failed is not the solution, but in the face of currency wars, she probably felt that she had to take a hard-line stance.
To regard it positively, she hasn’t denied multi-ethnicity per se. Her real intention was probably to push for a more harmonized multicultural society. It’s just that her words came out wrong.
You have said that the fiscal crises taking place at the so-called PIGS countries (Portugal, Ireland, Greece and Spain) come down to the issue of what to do with Germany. What do you mean by that?
To save a series of near-bankrupt countries, affluent nations must render support — and the most affluent is Germany, so it is up to Germany to save these economies or see them fail.
In addition, if Germany deserts these nations, it also means that Germany has denied the integration of Europe.
If Germany keeps to its stance of saving the weak to maintain solidarity, Europe as one unit will be able to survive, though some squabbles will continue.
There has been talk of creating an Asian version of the European Union. In light of what the EU has gone through, though, how realistic do you think that is? Is it at all possible for Asian nations with different cultures and at different stages of development to integrate?
If we don’t try to forcefully imitate EU-style integration, I think Asia has a better chance of achieving an economic union than Europe. That’s because in Europe, economic integration has been politically motivated. In other words, what’s happening now in Greece and the rest of the PIGS countries is the result of seeking economic integration in areas where there is no economic rationality. They integrated economies with vastly different economic conditions and went as far as sharing a common currency.
Behind the move is a political ideal of avoiding the recurrence of a major war in Europe, and to keep reunified Germany from going alone. So they sped up the integration process for political, security and diplomatic reasons.
The biggest lesson learned from this is that the more politically driven an integration is, the more risky it gets. We should leave the Asian countries alone. Then, just like a fruit ripens, it is likely that we will see a naturally integrated economic zone. If we try to politically maneuver the process, all kinds of issues will come up — whether a territorial issue between Japan and China or who to include or exclude from the union. The best way is to let the economy take a lead and let things take their own course.
We have discussed various symptoms of economic illnesses, but isn’t the real problem capitalism itself? As long as the economic system is based on the idea of maximizing profits, and on ongoing growth, will we ever see an end to the problems?
The idea that capitalism is at the root of all evil is wrong, I would say. Marx defined the mechanism of companies or economic activities earning profits as “capitalism,” but even without that term, such activities exist. If we call capitalism evil, we are also calling all of our economic activities evil.
The more appropriate focus of the debate should be how to avoid destroying ourselves and others. Destroying capitalism is not the answer.
We have experienced how socialism as an alternative to capitalism has bred dictatorships and terrorism around the world.
Rather, we should think of an economic system that allows all of us to coexist and coprosper. That’s why I have proposed “global citizenship.”
How can we achieve such an ideal society?
I think we should practice the “only if you benefit” approach in every way. I have advocated, for example, that Nissan employees buy Toyota cars, and vice versa. America should push a “buy-non-American policy,” and China should buy Japanese products.
Does that mean I shouldn’t support The Japan Times?
Yes. So people working at the JT should support the Mainichi Daily News and MDN people should support the JT.
You are saying this metaphorically, right?
I think we can actually try this approach, for a change. It could help both sides.