Halligan: The real lesson we can learn from Japan’s dramatic currency sell-off

Liam Halligan’s latest article for The Telegraph considers the role of political manoeuvres and industrial lobbying in Japanese economic policy:

when the victorious Kan on Wednesday ordered a wholesale yen sell-off, the country’s first currency intervention in six years, the markets were entirely wrong-footed. That allowed the yen to be pushed down by 3.1pc against the dollar and 3.4pc against the euro.

Since then, Japan’s yen manoeuvre has attracted much economic comment – as pointy-headed analysts have recalibrated their complex models and updated their spreadsheets. In the real world, though, currency interventions are strategic, not scientific. This one, too, should be analysed through an unashamedly political lens.

As well as trying to secure his position in the Diet, it appears Kan has also been looking out for certain vested interests:

The yen’s recent rise has deeply unsettled Japan’s powerful export lobby. Kan’s decision drew rare public praise from carmakers such as Toyota and Mazda. Adding to the air of euphoria, the Nikkei index of leading shares soared by 3pc on Wednesday, as the yen fell. With the Ministry of Finance declaring that “the strong currency can no longer be over-looked”, more selling may be in the pipeline. Japan’s currency, after all, remains higher than just three weeks ago.

But while such interventions may help Kan, Toyota, and Mazda, they do nothing to promote the long term health of the Japanese economy:

In the end, only structural reform, not short term fixes, will allow the Japanese economy to recover in a meaningful way – a lesson that holds in the UK as well. When I’ve argued against “quantitative easing” and debt-fuelled Keynesian boosts over the last two years, I’ve often been met with a glib one-word response: “Japan”.

Many UK policymakers have been brain-washed into thinking Britain needed to print money like crazy and prostrate itself with more state debt in order to avoid a Japanese-style “lost decade”. This was always dangerous nonsense.

Japan didn’t stagnate because it refused to do QE and a massive fiscal expansion, or because it waited and did both half-heartedly. Japan suffered a 10-year slump precisely because its too-big-to-fail, politically-connected “zombie” banks were allowed to stagger on, acting as a massive drain on the broader economy. The same is now happening in the UK. That’s the real lesson from Japan – a lesson that Prime Minister Kan, with his myopic currency move, has shown he is yet to grasp.

Read the whole article.

1 Comment

  • Current says:

    The interesting thing is that, as far as I understand it, the situation in Japan is quite similar to the one created by Keynesian economics in the west now….

    In Japan direct investing, such as owning shares, isn’t particularly simple. Many people simply save with a bank, or with the state-run post office banks.

    The problem in the past during the lost decade and the early 00s, was that the banks weren’t stable. Even years after the initial bust banks were failing because of bad debts. So, potentially wobbly banks are not trusted by other insitutions to be good counterparties. Those wobbly banks must behave very cautiously to ensure they remain in business. Secrecy ruled the day and laws prevented other parties from revealing problems.

    This is the situation that Keynesian economics has created in the west with the place of bank being taken by governments. Keynesian stimulus may encourage spending by agents that cannot gather enough information to come to an informed view of the future. Their consumption may lead to price signals that encourage investors to start investing again and bring idle resources back into use. (To put it another way, the employment multiplier may work). But, in order to bring this about the government must run up large debts. Agents with wider knowledge of the economy see those large debts as a sign of instability, as a sign that taxes are likely to be higher in the future and central banks may print money to cause inflation and devalue government debts. This risk makes them more cautious, not less, to them the Keynesian employment multiplier is a divisor. They are reluctant to make firm future plans because of the risks of future government action.

    The problem that we have now is one of “zombie states” not “zombie banks”.

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