Speaker 1: This episode of Bloomberg Benchmark is sponsored by HSBC, winner
Speaker 1: of Trade Finance America's sixteen Company Award for Best Supply
Speaker 1: Chain Finance Bank in North America HSBC. Where ambition connects
Speaker 1: with opportunity? Is it yen intervention like a term that
Speaker 1: is out there? If not, it totally should be and
Speaker 1: I should Trade market. Hello and welcome back to the
Speaker 1: Bloomberg Benchmark podcast. I'm Daniel Moss, Executive editor for Global
Speaker 1: Economics of Bloomberg. My colleague Tory, stillwell, fresh from a
Speaker 1: two week vacation in Europe, joins US in Washington. Ako
Speaker 1: is on leave. Tory, welcome back, Thank you, thank you.
Speaker 1: I was in France, Switzerland and Italy, but I worked
Speaker 1: for it because I ran a marathon at the very beginning.
Speaker 1: You want attempted to go to Japan. No, not this
Speaker 1: time around. Well, poor Japan. It can be forgiven for
Speaker 1: feeling a bit beaten last weekend attending the spring meetings
Speaker 1: of the International Monetary Fund and G twenty. That's the
Speaker 1: Group of twenty, the ministers and central bankers of the
Speaker 1: world's largest economies. It's finance minister one little sympathy for
Speaker 1: the pain being caused by a strong a end. But
Speaker 1: it wasn't supposed to be that way. Let's take a
Speaker 1: step back. While these days China gets all the buzz,
Speaker 1: there was a time not too long ago when serious
Speaker 1: people thought Japan's economy was going to swallow the world.
Speaker 1: It was once the world's second largest economy by a
Speaker 1: long way, and it still matters as the world's third
Speaker 1: largest economy, a major American ally, and an anchor of
Speaker 1: security in the post World War two Pacific. That's right,
Speaker 1: But ever since a stock and property market bubble burst
Speaker 1: in the early nineties, authorities there have been experimenting with
Speaker 1: ultra low interest rates, bond purchases, and fiscal expansion. The
Speaker 1: Bank of Japan was actually a pioneer of quantitative easing,
Speaker 1: subsequently adopted by most major economies, including here in the US,
Speaker 1: and yet it's stuck or worse. A bold effort a
Speaker 1: reflation by Prime Minister Shinzo Arbe and Bank of Japan
Speaker 1: Governor Hirohiko Kuroda got off to a promising start, but
Speaker 1: appears to installed. Not only is the yen doing the
Speaker 1: opposite of what it should be doing, but the I
Speaker 1: M F forecast the economy will probably shrink this year.
Speaker 1: Thanks for nothing. Well, let's let's unpack that for just
Speaker 1: a second. So we're saying that the yen is doing
Speaker 1: the opposite of what it should be doing. So the
Speaker 1: economy isn't doing great, it's struggling, and yet the yen
Speaker 1: is strengthening. Is that right? Yes, and it's strengthening even
Speaker 1: though they really throw in the kitchen sink at the
Speaker 1: economy as far as monetary policy is concerned. So joining
Speaker 1: us on the phone to help us make some to
Speaker 1: all this from Tokyo after just returning from the I
Speaker 1: m F meetings is Bloomberg story. Fudioka, So you travel
Speaker 1: a lot with the finance minister, and you're actually in
Speaker 1: d C with him this weekend. How's your how's your
Speaker 1: jet lag hanging up? Oh? But you know it's getting better? Good? Thanks,
Speaker 1: thanks for having me today. Of course, thanks for joining us.
Speaker 1: So um so this did not sound It was a
Speaker 1: happy meeting here in Washington with all these finance ministers.
Speaker 1: And at this point, several years into abonomics and karudonomics,
Speaker 1: the place was supposed to be flying. Japan was supposed
Speaker 1: to be doing a lot better. What gives? Yeah, I
Speaker 1: mean that's right, hasn't had much good news decently have
Speaker 1: to give you an idea. Japan economy contracted in the
Speaker 1: final and to see a good chance of another contractionary
Speaker 1: too much. At the same as, they pointed out that
Speaker 1: ye strengthening deversing weakening trends in the past few years
Speaker 1: since I mister I became too power. I mean, that's
Speaker 1: a big contept for Polihemic because overall it is squeezes
Speaker 1: the Javanese corporate profit, makes them cautious of our investment
Speaker 1: and raising wages, so that stopping the economic badge cycle.
Speaker 1: So that's why Javanese finance Miss tartle as all pride
Speaker 1: hard to get some sympathy from G twenty Last weekend,
Speaker 1: he told at the G twenty diner that disorder or
Speaker 1: accessible currency movements und terble and at one or one
Speaker 1: meeting with the historiary secondary Jack Clu, he said he
Speaker 1: has a deep concert with recently appreciation and repeated this
Speaker 1: is the currency movements are und leveled. It's unusual for
Speaker 1: Japanese finance mister to express his concert on follign exchange
Speaker 1: in markets in this excess way. But what happened was
Speaker 1: within twenty four hours after as we spoke to reporters,
Speaker 1: Jack Crew said, Japanese to proce some secret demand and
Speaker 1: markets are moving alday despite PFC engaged. That indicated a
Speaker 1: create difference with asshole, and that's investors took it as
Speaker 1: a big non overroo the US for Japan interming in
Speaker 1: markets even if it wants it a frustrating moment for
Speaker 1: Japanese officials. Clearly, what about the decline in oil toro
Speaker 1: That was supposed to be a good thing, but that
Speaker 1: really hurt the efforts to reflect the economy. You know,
Speaker 1: I think to providing some support to consumers epifies those
Speaker 1: in living in the la areas. So oil placed troup
Speaker 1: has pushed down the lid of infreation. So unlike other
Speaker 1: major nations, the Japan has experienced deecreation for about sixty years,
Speaker 1: So the program decreation has a big crisp potaban company's
Speaker 1: pussholes to keep their decreation in mindset. I want to
Speaker 1: also put put this in context a little bit. So
Speaker 1: when we're talking about the strengthening in UM, if we're
Speaker 1: comparing it to the darts up just about ten percent
Speaker 1: this year, and that's the second most of most of
Speaker 1: the major currencies in the world. That seems like quite
Speaker 1: a significant move. But how does that compare two years
Speaker 1: past up until this year? I think since we started
Speaker 1: a Yeah, we can the twenty patents of saty patents,
Speaker 1: so so this could be just some unwinding of that. Then, yeah,
Speaker 1: that's true, that's true. But if you think it was weird,
Speaker 1: Javan started it, but it went absolutely seventy five point
Speaker 1: thirty five and the companies are really struggling with the
Speaker 1: level that has improved. But companies, it's better for now.
Speaker 1: Companies have a weekend yet and life in Japan is
Speaker 1: still pretty comfortable. People still make a good living. There's
Speaker 1: no sense of crisis. Does any of it matter in
Speaker 1: the short term, yes, I mean like that's probably why
Speaker 1: we haven't had major changes in the compolicies. But in
Speaker 1: the long term that's got via concer and who knows
Speaker 1: what's going to happen with if I continues to have
Speaker 1: at the creature and why we have one of the
Speaker 1: biggest system by that, well, it's been great. You could
Speaker 1: join us, so soon after arriving home get some they
Speaker 1: do so after a word from our sponsor, will be
Speaker 1: back with our next guest. This episode of Bloomberg Benchmark
Speaker 1: is sponsored by HSBC, with over eight thousand global relationship
Speaker 1: managers on the ground in over sixty countries. HSBC mixture
Speaker 1: Global Ambition their local business HSBC Well, our next guest
Speaker 1: is also no stranger to Japan or Japanese economics. Jeff Young.
Speaker 1: You've been following the country for a couple of decades,
Speaker 1: including a stint as chief economist at City Group in Tokyo.
Speaker 1: You now have your own firm called Deep Macro. It's
Speaker 1: great you could join us. You know, listening to Taru
Speaker 1: makes me wonder whether this current condition is really just
Speaker 1: normal for Japan and the decades after World War Two
Speaker 1: that saw the spectacular growth work light with the aberration. Yeah,
Speaker 1: I think that there's something to be said for that. Um.
Speaker 1: Right after World War Two there was an enormous amount
Speaker 1: of reconstruction that had to happen UM, an enormous amount
Speaker 1: of the labor force that had to be brought into
Speaker 1: the modern economy, and an enormous catch up that had
Speaker 1: to be done with the United States and the other
Speaker 1: advanced countries. Japan pretty much reached that point. Uh some
Speaker 1: you know, in the late nineteen eighties, the early nineties
Speaker 1: UM and since then it's been dealing with problems like
Speaker 1: the demographic issues. And for a country undergoing Japan's demographic shifts,
Speaker 1: I think this really does raise a question how fast
Speaker 1: can you expect to grow? Right? But many other countries
Speaker 1: are also facing huge demographic issues that will catch up
Speaker 1: with them sooner or later. And yet Japan really does
Speaker 1: seem to be mired in this environment where they can't
Speaker 1: get inflation to pick up no matter what they do,
Speaker 1: where the economy is starting to struggle and is obviously
Speaker 1: creating concern out there. I mean, is this something unique
Speaker 1: to Japan though, that that no matter what they try
Speaker 1: to do, they just can't get it going like they want. Well,
Speaker 1: I think that there's a couple of things to point out.
Speaker 1: You're entirely correct that there are many countries who have
Speaker 1: similar demographics at least looking forward, but Japan was you know,
Speaker 1: they have, they aged much faster than anybody else if
Speaker 1: you look at things like the old age dependency ratio,
Speaker 1: if you look at things like the change of the
Speaker 1: working age population, Japan sort of hit the skids in
Speaker 1: terms of UM demographics being favorable for growth you know,
Speaker 1: quite a bit before. But I think that what you're
Speaker 1: pointing to if if um, you know, I would extent
Speaker 1: that is that you know, countries like Korea, UM, you know,
Speaker 1: they have you know, a somewhat japan Esque future to
Speaker 1: look at, at least in terms of whether demographics are going.
Speaker 1: The other thing that I think has something to do
Speaker 1: with the deflation, although it's been an awful long time
Speaker 1: h is Japan also had its financial crisis UM, a
Speaker 1: big one UM and it in the ninety nineties, and
Speaker 1: the slow response to that UM the near collapse of
Speaker 1: the banking system once twice, three times UH. The impact
Speaker 1: that that has had throughout the economy seems to be
Speaker 1: very very deep rooted. UM. Difficult to quantify, especially given
Speaker 1: that the crisis has been over for an awful long time,
Speaker 1: but it does seem to have had a long term
Speaker 1: negative effect on sentiment that officials, including Governor Kuroda, have
Speaker 1: continuously pointed out that they're really trying their best to undo.
Speaker 1: And I think that maybe the banking crisis one of
Speaker 1: the root causes of that. The demographic issues have been
Speaker 1: pretty well documented. I mean, if you flip through late
Speaker 1: night TV and a hotel in Tokyo, you'll come across
Speaker 1: lots of ads for adult diapers, an adult daycare. Is
Speaker 1: there something beyond that? Let's talk about the term kiretsu
Speaker 1: yes UM. The Japanese industrial groupings, usually with a bank
Speaker 1: UM at the center. UM. They'd have UM generally speaking,
Speaker 1: you know, manufacturing companies and insurance company UM. A lot
Speaker 1: of different UM companies in an industrial grouping UH, and
Speaker 1: a lot of the business would take place within those
Speaker 1: groups UM. I don't think that they've had such a
Speaker 1: role in the economy UM recently. One thing that really
Speaker 1: has been noticeable during the period of deflation or very
Speaker 1: close to deflation, is the relationship between small firms and
Speaker 1: arge firms, where there has been just a continuing grinding
Speaker 1: pressure from the large firms towards their smaller suppliers to
Speaker 1: please cut your prices. We're not going to pay you
Speaker 1: more this year. In fact, we're going to pay you
Speaker 1: a little bit less, and that has had a very
Speaker 1: UH that has had a pretty strong deflationary impact of
Speaker 1: the economy because the small businesses employ a lot of people,
Speaker 1: so if they're receiving every year a little bit less
Speaker 1: for the products they produce, that has meant that every
Speaker 1: year they've been having to pay their workers a little
Speaker 1: bit less. UH. And that has I think been one
Speaker 1: of the structural forces if you look at the how
Speaker 1: the corporate sector is arranged, that has contributed to this
Speaker 1: undertow let's say, of deflation and also contributing to that.
Speaker 1: Just kind of bringing it back to the conversation that
Speaker 1: we had earlier at the top of the show, is
Speaker 1: the strengthening in And you know, at the I m
Speaker 1: F meetings Japan really didn't get a lot of sympathy
Speaker 1: UM Trosury Secretary Jack lou here in the US really
Speaker 1: urged them to just kind of ride this out, to
Speaker 1: not engage in any intervention to weaken their currency. Is
Speaker 1: I'm curious about this is yen intervention like a term
Speaker 1: that is out there? If not, it totally should be
Speaker 1: and I should trade market. I hadn't heard it. Actually,
Speaker 1: I'm I have not either, and it's kind of surprising.
Speaker 1: That's a good one. UM. I think Look, the G
Speaker 1: twenty UM have a longstanding UH policy against intervention unless
Speaker 1: markets are disoriented disorderly UM. And I think that they're saying, look, UM,
Speaker 1: the yen has appreciated but it hasn't really appreciated in
Speaker 1: a disorderly fashion yet. I think that there's a general
Speaker 1: unease globally also with this whole phenomenon of negative interest
Speaker 1: rates UM. Japan wasn't the first to go negative. You know,
Speaker 1: they're probably the first towards zero UM long ago UM,
Speaker 1: so Japan can certainly say, look, we're not unique there.
Speaker 1: But I do think that when they rather surprisingly cut
Speaker 1: their part of their indust rate, it's only very small
Speaker 1: portion of the whole structure, but some of the indust
Speaker 1: rates below zero in January this year, that did seem
Speaker 1: to represent a broadening um of the whole negative industrate
Speaker 1: phenomenon from Europe, where several central banks maintain some form
Speaker 1: of negative rates, now Japan has it. You have some
Speaker 1: people talking about it in the US, but I think
Speaker 1: that that's just uncharted territory so UM. On the monetary side,
Speaker 1: there does seem to be a sense of let's not
Speaker 1: do anything dramatic and let's try to see if what
Speaker 1: China is doing in terms of stimulating the economy of
Speaker 1: fiscal policy um UM, tightening up regulations on capital outflows
Speaker 1: a little bit more. Maybe that's enough to sort of
Speaker 1: stabilize the global industrial cycle and to stabilize the emerging markets,
Speaker 1: which were really the locate the locus of the weakness
Speaker 1: last year. And there's also been some talk of helicopter money.
Speaker 1: Uh in Japan. Would you walk us through that idea
Speaker 1: a little bit? Sure? Um, it really is basically a
Speaker 1: tax cut or fiscal spending that is financed by the
Speaker 1: central bank rather than the government issuing debt. So another
Speaker 1: one of these very unorthodox measures. Yes, I think so,
Speaker 1: And you could argue that Japan has implicitly done this before. UM.
Speaker 1: But the I think the arguments that it might be
Speaker 1: bigger or even more radically. If the Bank of Japan
Speaker 1: is buying the bonds that would be issued in order
Speaker 1: to finance this fiscal expansion, maybe they would just stuff
Speaker 1: them in the drawer and not ask to be repaid
Speaker 1: when um they come to This would be a true monetization. UM.
Speaker 1: I don't think that Japan is there, but there has
Speaker 1: been some talk of that, and I think that there's
Speaker 1: a very important distinction between the circumstances in which perhaps
Speaker 1: helicopter money is appropriate and the circumstances that the Japan
Speaker 1: faces right now. You know, Jeff and Tory. It feels
Speaker 1: like there's a real element of tragedy to this. You
Speaker 1: have these two guys, Are and Corona. They've done a
Speaker 1: lot since they've been in office, and yet it seems
Speaker 1: like they're swimming against these long term forces and in
Speaker 1: the case of oil, a bit of bad luck that
Speaker 1: are just thwarting them. I mean, it does seem like
Speaker 1: a tragedy. Really, can two men really make a difference?
Speaker 1: This would suggest not well. I think that there are
Speaker 1: a couple of the couple of big forces that we've
Speaker 1: spoken about. The first is demographics. The second would be
Speaker 1: just the very large level of public debt, which you know,
Speaker 1: I would I would argue that your colleague Tour referred
Speaker 1: to indirectly when he talked about the consumption tax, Like
Speaker 1: the reason why the Ministry of Finance has consistently wanted
Speaker 1: to hike this tax is to raise revenue, to begin
Speaker 1: to slow the debt, the pace of debt accumulation, and
Speaker 1: maybe to reduce it eventually. And this is essentially just
Speaker 1: a sales tax. That's true. But the problem is that
Speaker 1: Japan has so much debt um as a result of
Speaker 1: these past fiscal stimulus packages, as a result of just
Speaker 1: the weakness of the economy, um that the public is
Speaker 1: now expecting these tax hikes pretty regularly. And so if
Speaker 1: you have really poor demographics and you have, um a
Speaker 1: public that expects tax hikes to pay for those, it's
Speaker 1: not clear that the countercyclical measures that the Prime Minister
Speaker 1: and the Governor of the Central Bank have been implementing
Speaker 1: are really enough to change the tide. You can certainly
Speaker 1: affect growth for a little while, which is which has happened,
Speaker 1: but you tend to go back into that sort of
Speaker 1: negative equilibrium of a very very slow decline. I thought
Speaker 1: we'd closed with a bit of historical perspective. You know,
Speaker 1: the way people talked about Japan back in the late
Speaker 1: eighties in the early nineties, there was a real sense
Speaker 1: that was going to swallow the world. Everyone was struggling
Speaker 1: to adopt Japanese decision making practices. No c suite was
Speaker 1: complete without books lying around called things like oh, I
Speaker 1: don't know the Toyota way or a japan that can
Speaker 1: say no. It feels a little embarrassing in retrospect. Should
Speaker 1: we have known better? And is there another Asian country
Speaker 1: we're making the same mistake about? Well? I think I
Speaker 1: know where you're going there, and I think that we
Speaker 1: may indeed be making that mistake. UM. I would just
Speaker 1: say is from my experience as an economist that it's
Speaker 1: very difficult to separate out the micro foundations of success
Speaker 1: and failure versus the macro ones. Um. Everything that you
Speaker 1: just mentioned were uh, micro economic strengths of Japan, many
Speaker 1: of which they still have. And as you pointed out,
Speaker 1: you know, there are some very good firms. It's a
Speaker 1: great place to live now, especially given that it's not
Speaker 1: as expensive as it used to be. But if you
Speaker 1: have too much debt um and if you have a
Speaker 1: banking crisis, um, and then you compound that with the demographics,
Speaker 1: the best corporate sector in the world is going to
Speaker 1: have trouble growing. And with respect to China, perhaps that
Speaker 1: question is becoming a legitimate one. Clearly, there are a
Speaker 1: lot of good Chinese companies. There's obviously a very vibrant UH.
Speaker 1: I don't know what the right word is, acquisitive, capitalistic ethic,
Speaker 1: real growth ethic out there. But if China continues to
Speaker 1: accumulate debt at the rate that it has been um,
Speaker 1: will that become as big of a constraint on growth
Speaker 1: as it has in Japan. I think it's a macroeconomy.
Speaker 1: I'd have to say it might well. Jeff, we could
Speaker 1: talk about this for quite a while, but we've got
Speaker 1: to wrap it up. Thanks for sharing your perspective with us,
Speaker 1: and thanks to all of you for listening to Bloomberg Benchmark.
Speaker 1: We'll be back next week. Until then, you can find
Speaker 1: us on the Bloomberg terminal and Bloomberg dot com, as
Speaker 1: well as iTunes, pocket Cast, Stitcher, and Google Play. While
Speaker 1: you're there, take a minute to rape and review the
Speaker 1: show so more listeners can find us, and feel free
Speaker 1: to let us know what you thought of the show.
Speaker 1: As always, we are available and active on Twitter. I'm
Speaker 1: at Tory Stillwell and Dan is at danielmas d C. Jeff,
Speaker 1: do you have a Twitter? Yes, I'm looking at it
Speaker 1: right now on Jeff's business card. It's at Deep Macro.
Speaker 1: We'll see you next week. This episode of Bloomberg Benchmark
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