Culturally, the Land of the Rising Sun and the Occident are admittedly very different. The laws of physics apply the same way in both the western and eastern hemispheres. The same can be said about the laws of economics, even though a certain local and cultural effect on the economy is always present. Recently, the question of whether the fate of Japan\u2019s ailing economic growth is now striking Europe has begun to be heard increasingly often. The answer is quite likely \u201cyes\u201d, or, if you look at European developments in the past decade, it is most certainly \u201cyes\u201d.<\/p>\n\n\n\n
For nearly the past 40 years, Japan has had the oldest population in the\nworld. According to the UN, 27% of the Japanese population is older than 65,\nand, on average, there are two working people per pensioner. In Estonia, there\nare currently three working people per pensioner; by 2040, however, we will be\nin the same situation currently faced by Japan, that is, with two working\npeople per one pensioner. Still, the future of Japan is even more complicated \u2013\nit is estimated that by 2050, 40 per cent of the Japanese populace will have\nreached the age of retirement. Japan is a demographic indicator on the path\nthat Europe is also travelling on. A total of 22% of the population of Germany,\nwhich is the largest Member State of the European Union, are over 65 years of\nage, and by 2050, this percentage is estimated to rise to 31. <\/p>\n\n\n\n
The Japanese economic\nmiracle was followed by a rapid decline<\/strong><\/p>\n\n\n\n In the eighties, Japan was a complete economic miracle, similar to China\nat the beginning of the 21st century. While the GDP per capita in Japan was\nabout USD 9000 in 1980, then a decade later, this indicator had reached US 23,000.\nAt the time, Japan was the second largest economy in the world, behind the\nUnited States, an engine of innovation, and such rapid growth did certainly not\ngo unnoticed in Washington, either. Today, it is the trade war between the\nUnited States and China that is generating a lot of heat; back then, it was a\nrapidly growing Japan that was the main economic adversary of the United States.\nTensions were relieved with an agreement signed in 1985, at the Plaza Hotel in\nNew York City, where the five leading countries in the world at the time\ndecided to intervene in the management of exchange rates to mainly ensure the\nweakening of the US dollar against the yen, but also against the Deutsche Mark.\nOver the next two years, the dollar lost half of its value against the yen,\nwhich clearly increased the export capability of US companies. History looks at\nus with an ironic gaze when we remember the fact that the Plaza Hotel, where\nthe agreement was born, was sold in 1988 to none other than Donald Trump. Mr\nTrump compared the purchase of the Plaza Hotel with buying the Mona Lisa<\/em>.<\/p>\n\n\n\n The Japanese economic miracle came to an end in the last days of the\n1980s, when the Japanese stock market index, the Nikkei, hit the intraday high\nof 38,957 points, on 29 December 1989 \u2013 at present, the index has fallen to the\n22,000 point level. Yet, at the turn of the decade, analysts were still\nforecasting the rise of the Nikkei to 45,000. Ironic smirks towards analysts,\nwho are able to predict the continuation of trends but rarely their change,\nwere as relevant then as they are now. <\/p>\n\n\n\n At the same time, Sony from Japan purchased Columbia Pictures in the\nUnited States for USD 3.45 billion, and the real estate branch of Mitsubishi\nacquired Rockefeller Center \u2013 the Japanese bull market seemed unstoppable. And\nyet, a major crisis followed, where the Nikkei index fell 38% in 1990 and has\nsince been unable to surpass those peaks. The rapid economic growth was\nfollowed by a generation-long stagnation, constant monetary policy trials and\nerrors, let-downs, new trials and further let-downs.<\/p>\n\n\n\n We have now arrived at a situation where the debt level of the Japanese\ncentral government is about 2.5 times the size of the state\u2019s GDP. In the Eurozone,\nthe debt level of governments is, on average, 85 per cent of the gross product\nof the community, despite the fact that the Maastricht criteria, which is the\nbasis of the eurozone, sets out 60% of GDP as the maximum debt level. The Bank\nof Japan owns approximately 45 per cent of the government\u2019s debt. In addition,\nthe Bank of Japan holds 80 per cent of the ETFs of the Japanese stock exchange;\nhaving cultivated the purchase thereof over the entirety of the past decade. A\ntotal of 70 per cent of Japanese government debt is financed domestically. The\nlesson here is that a society consisting of a larger number of older people is\nfrugal, preferring safe domestic government bonds over other overseas financial\nassets with a higher rate of return. The 10-year Japanese government bond is\ncurrently yielding a negative return \u2013 investors are paying a premium to lend\nmoney to the central government with currently the highest debt level in the\nworld. All of this is very difficult to explain using economic knowledge\nobtained in school. <\/p>\n\n\n\n If we were to distribute economic growth solely among the working-age\npopulation, the situation in Japan would certainly not be as bad as one could\nexpect. During the period of 1988\u20132018, the average economic growth of Japan\nper working-age inhabitant (age 20\u201364) was the second best among G7 countries,\nbeing bested only by the same indicator of \u201cDas\nExport Machine<\/em>\u201d Germany, but outperforming the United States and the United\nKingdom.<\/p>\n\n\n\n All of these modern day events are caused by the interaction of two\nunfavourable factors \u2013 the ageing population and the expanding debt level.\nEurope, the United States, and Japan were all caught up in the horrors of World\nWar II, albeit fighting on opposite sides. They all experienced a flurry of\noptimism after the war ended, and birth rates grew rapidly. Countries exited\nthe war with very different baggage \u2013 Europe\u2019s infrastructure had essentially\nbeen destroyed, the United States, however, \u2018escaped\u2019 direct destruction with\nonly the Pearl Harbour attacks, in addition to the human losses suffered in the\nliberation of Europe and the Pacific region, of course. Post-war optimism was\nas unifying as the baby boom that followed the singing revolution in Estonia.\nFor example, 4.54 children were expected to born per woman\u2019s life in Japan in\n1947. This indicator fell to 2.07 children per woman, i.e. essentially to the\npopulation replacement level, in only a decade. While the children of our\nsinging revolution are presently in the labour market, and decades of\nwork-filled years await them, then the corresponding post-war generation of\nJapan and the United States has retired, encumbering the state budget with\npensions and medical expenses. <\/p>\n\n\n\n Market stimuli in the\n\u2018too little, too late\u2019 style does not work<\/strong><\/p>\n\n\n\n Japan\u2019s financial experiments have always been an indicator; borne out\nof necessity, not merely the desire to experiment. Europe has a lot to learn\nfrom this. One must always consider that Japan is a sovereign state and\ntherefore the master of its own currency. The Eurozone is a community of\ncountries. For the past twenty years, the Bank of Japan has been forced to keep\nthe interest rate near zero, without being able to lead inflation anywhere near\nthe expected rate of two per cent. They have also started purchasing central\ngovernment bonds for the first time; however, doing so in a very limited\nextent. If we were to generalise the experiments carried out in Japan, it could\nbe summarised as \u2018too little, too late\u2019. The Bank of Japan has taken a number\nof correct steps, but they have been too careful and modest in doing so, and\nthey have immediately ceased any stimulation at the sight of any positive\nmarket signals. This has turned out to be a mistake. Every new notification\nabout another economic stimulus package feels like news of another Barbra\nStreisand farewell tour of the past. <\/p>\n\n\n\n The United States demonstrated exemplary skill in slowing down the\neconomic recession following the 2008 financial crisis. The banking sector was\nquickly capitalised, the automotive industry was also saved. This was all done\neven in a situation where some bank managers claimed they did not need\nadditional capital. The government made them an offer that they could not refuse.\nIn addition, Ben Bernanke, then Chair of the Federal Reserve System, initiated\na massive government bond purchase programme. By the way, Ben Bernanke defended\nhis Doctoral Thesis in 1979, at the Massachusetts Institute of Technology\n(MIT), specifically on the topic of the Great Depression. To many, the Fed\u2019s\nunconventional activities at the time felt like sacrilege, which would give\nlife to a thousand-headed dragon named inflation who would no longer be tamed.\nHowever, this did not happen in the United States or Europe, and definitely not\nin Japan. While the United States was effective in its actions, Japan\u2019s actions\nwere ineffective.<\/p>\n\n\n\n Interest policy is always the primary tool of central banks. What should\none do in a situation where interest rates are already at zero, or even\nnegative? A zero interest rate is like a communist utopia in a capitalist\nsociety \u2013 free money for everybody, which means that saving money is punished\nand lending is facilitated. Interest should act like a yardstick, used to\nassess the profitability of business projects. Of course, the loan margin is\nalso added to the interbank floating interest rate \u2013 no one gets a loan with\nzero interest from a bank. This policy brings about the sustainability of\nzombie companies that do not live or die, and reduces the need to be\ninnovative; it also inhibits inflation, and reduces economic growth in the long\nrun. It is also said about Japan that one of the reasons behind its poor\neconomic growth are zombie companies that are only able to survive in a very\nlow-interest environment, hindering economic development. <\/p>\n\n\n\n According to the OECD, the creation of new companies, and the number of\nbankruptcies on the other hand, as a ratio of the total number of companies, is\nabout three times as low as in other developed countries, meaning that the\nnormal blood circulation of entrepreneurship is not functioning. In Japan, the\nnumber of company bankruptcies has decreased for the past seven consecutive\nyears. Zombie entrepreneurship prevents working-age people from moving to\ncompanies with higher added value. Will Europe meet the same fate? Based on the\nexample of Europe, it is too early to talk about zombie entrepreneurship yet;\nemphasis on the word yet<\/em>, since the\nEuropean Central Bank\u2019s zero, or rather negative, basic interest rate policy is\nstill in its infancy. In this category, the Italian banking sector stands out;\nnon-performing loans constitute 9 per cent of all issued loans there. What\nwould happen to the proportion of Italian non-performing loans if Euribor were\nnot negative? The total value of all listed companies in Germany today is as\nlarge as Microsoft\u2019s and Apple\u2019s market value together across the pond.\nCulturally, a successful German Mittelstand<\/em>\nentrepreneur prefers to be the owner of their incognito family business,\ninstead of a well-known major shareholder in a financially X-rayed listed\ncompany. It may be presumed that as the low-interest environment continues,\nzombie entrepreneurship will also take root in Europe, especially in\nuncompetitive Southern Europe.<\/p>\n\n\n\n Italy is the problem\nchild of the euro area<\/strong><\/p>\n\n\n\n If we were to draw conclusions based on the different examples from the\nUnited States and Japan, we could say that excessively modest behaviour by\ncentral banks is not the solution. If the wish is for a change in monetary\npolicy to have an immediate effect on the course of a crisis, one must fire the\nentire salvo of financial artillery at the same time. Since the European\nCentral Bank may currently own up to a third of bonds issued by Member States,\nit can certainly be said that this limit is starting to become outdated. All\neyes are now on Italy \u2013 the country which is said to be too important a member\nof the Eurozone to ignore their problems, and, at the same time, too big to\nsave. The primary domestic financial indicator of Italy which, due to extensive\nmedia coverage, is familiar even to every Italian housewife, is la spread<\/em>, i.e. the difference between\ninterest rates of the 10-year government bonds of Germany and Italy. This\nprovides a real-time evaluation of financial markets which shows how much\npoorer the Italian economy is considered to be compared to the German economy.\nIf Brussels were to punish Italy with a financial penalty in response to a\nbudget deficit that is too high, they would likely be shooting themselves in\nthe foot \u2013 the populists in power would domestically gain more verbal\nammunition to rail at Brussels and paint Brussels to be the root cause of all\ntheir troubles. Based on past experience, it only seems reasonable for the\nEuropean Central Bank to raise the bond purchasing limit from 33 per cent to,\nfor example, 50 per cent. The purchasing of bonds would only be continued if\nthe Member State were to implement difficult structural reforms. These would\nprimarily involve significant relaxation of rigid employment relationships\nalmost everywhere in Europe, and simplifying the business environment by\nreducing the regulatory burden. Perhaps Europe would offer the Member State\ntemporary monetary relief and turn a blind eye to the budget deficit, if the\nMember State were to implement reforms improving long-time competitiveness \u2013\nthis way, the carrot and the stick would be in one package. This is not a cure\nfor the worsening demographic situation, but it will help to restore economic\ncompetitiveness in the world arena. At least temporarily.<\/p>\n\n\n\n It is precisely with this \u2018whole salvo\u2019 mandate that Shinzo Abe became Prime Minister of Japan in December 2012, and he is still in office today. Prime Minister Abe\u2019s solution to ailing economic growth was based on three arrows, as he himself referred to them \u2013 massive monetary easing, structural reforms and fiscal stimulus by the state. The average return on equity of businesses before Abenomics was initiated was four per cent; at present, it has reached ten per cent, which is still lower than the corresponding indicator for European and US companies. It is clearly too early to draw final conclusions regarding Abenomics; however, the growth of nominal GDP, the weakening of the yen \u2013 which the Obama administration endured much better than the Trump administration \u2013 and the continuous decrease of unemployment, are clear facts. It is likely that Europe has, yet again, something to learn from Japan \u2013 \u2018too little, too late\u2019 is not a great solution.<\/p>\n\n\n\n <\/p>\n\n\n\n Viljar Arakas Culturally, the Land of the Rising Sun and the Occident are admittedly very different. The laws of physics apply the same way in both the western and eastern hemispheres. The same can be said about the laws of economics, even though a certain local and cultural effect on the economy is always present. Recently, the […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31],"tags":[],"class_list":["post-4489","post","type-post","status-publish","format-standard","hentry","category-blog"],"yoast_head":"\n
CEO of EfTEN Capital
September, 2019<\/p>\n","protected":false},"excerpt":{"rendered":"