Japan: The Lost Eternity?
As I write this, investors are increasingly hopeful that the Bank of Japan (BoJ) will deliver a 25 basis point interest rate cut on Friday, taking policy rates back down to 0.25%. Mere speculation on this front is buoying global financial markets. However, if the BoJ does deliver tomorrow, this begs the question, will Japan ever be able to ‘normalise’ its monetary policy? (i.e. bring interest rates more into line with the US and Europe – before their aggressive cuts.)
Earlier this week, the Nikkei 225 stock index plunged below 7,000 points, taking it to its lowest level since 1982 – the era of Donkey Kong and E.T. That meant the Nikkei was down 82% from its record high of 39,000 in December 1989. That’s an entire generation of wealth gone, and I cannot think of any stock market which has performed so chronically badly in modern history, if ever.
Ironically, some investors were speaking of Japanese equities as a safe haven a few months ago – a view which I thankfully refused to believe at the time.
Making matters worse, the unwinding of yen ‘carry trades’ recently – notwithstanding the past few days’ renewed weakening of the yen – has been crippling for the Nikkei, because a stronger yen undermines the competitiveness of Japanese exports – the one area in which Japan consistently relies on to support the economy.
The real question is, when will Japan return to normality?
That depends on what ‘normality’ means.
Does it mean…
…the era of modest growth in the era of former premier Junichiro Koizumi (2001-06)?
The 1990s ‘lost decade’ of stagnant growth or economic contraction?
The 1980s ‘bubble’ economy go-go years?
The 1960s-70s catch-up with the West era?
The post-war reconstruction of the 1950s?
What about the 1600s-1800s, when Japan was in self-imposed isolation under military rule?
My point is that Japan’s economy has been so abnormal for so long, it’s hard to tell these days.
The bottom line is that with Japan’s population declining, a full-scale recovery is probably impossible without large-scale immigration.
However, even if Japan keeps the door closed, things might not be a disaster. If the population declines faster than GDP, then per capita incomes will actually increase. Eventually, probably by the late 21st century, a richer and less crowded Japan might enjoy rising birth rates once again, rejuvenating the population.
Japan’s global influence will have diminished by then, but that won’t be a problem. Japan has shown only lukewarm interest in being a global power.