The tunnels of Tokyo

Japan is an absolutely fascinating country. Adding the to mystery and the fascination is that I'm never quite sure whether the reports coming out of there are true or not. Some of them are just too bizarre for words, while the use of
Engrish provides an inexhaustible supply of amusement. I saw some cartons of Japanese food at a local store the other day. The only thing I could decipher was the English slogan "Peanut & Me." I shudder to think that the ingredients are.

Continuing the note of just plain weird stuff, there's a reporter who claims that there massive secret tunnels under Tokyo. He's been tracking down inconsistencies in published maps, construction records and apparently inexplicable events. For instance, he claims that the new O-Edo Subway Line had been there already long before the official building began. I am in no position to assess the veracity of his claims, but with Japan, few things surprise me anymore these days. It would not surprise me that there are more tunnels in existence than the maps bear out, but that would be true of most cities with an underground transportation system. It's the scale of the undocumented tunneling that's the issue here. It would make sense to have some kind of an underground bunker to keep the government safe in case of a military attack, or perhaps even in the case of a big earthquake. Then again, I'm not sure you'd want to be underground in a case like that. Anyone with seismic imaging equipment in Tokyo?

Japan follow-up

There have been many good comments in response to yesterday's blog entry on the Japanese economy, deserving of a more thorough response than a long comment. Besides, it's easier for me to write this way, so this is not an entirely selfless exercise.

Jakub Rehor commented on the yield curve:

Sorry, the yield curve is already squashed. The 1 year JGBs are yielding 0.0184%, the 30 years 1.4577%. Monetization of debt and reversal of deflation may not move nominal rates much, but the real rates would drop and stimulate the economy.

I'd add that the 10-year bond is now trading at around 70 basis points, so the yield curve is indeed pretty flat already. Squashing the yield curve down even further will indeed reduce interest rates, but I wonder how much stimulus this will actually bring to the economy. Suppose the yield curve goes effectively to zero all the way out to the maturities of 30 years. Initially this will produce a nice (but one-off) price gain for holders of the bonds, but once the curve is stuck at nominal zero, it will cause additional problems for financial institutions who won't be able to ride the yield curve anymore. This means they lose their last instrument for generating relatively low-risk investment income. Of course, with 10-year bonds at 70 bps right now, the situation is already serious, but flatlining at zero could make things worse for the financial sector. And the BoJ would have to keep buying JGBs in order to keep the yield curve pinned down. Once yields reach zero, there's little point in buying any additional bonds. Then again, the state of the financial sector is already so grim that a public bailout and de facto nationalization of the banks may already be inevitable. Whether it's a direct takeover or one that goes through the balance sheet of the BoJ does not matter too much in the end.

As for structural reform, there is indeed an additional deflationary danger in that. But the current situation of endlessly propping up zombie companies can't go on forever either. Corporate Japan has long had a problem with generating a good return on capital, as the fixation has always been on market share rather than economic value added. While the P/E ratio of the Japanese stock market has been very high compared to the US and Europe, its P/BV has been very low; in other words, the amount of earnings generated per unit of capital has been miserable. Eradicating excess capacity will be necessary, as is fixing the NPL problem. You can cure the NPL problem to an extent by inflating your way out of it, but thus far the money supply has proved hard to budge, even with huge increases in the monetary base. It's going to take both structural and monetary measures in order to get the economy going again, and that would require a level of cooperation between the government and the BoJ that we're unlikely to see anytme soon. Politics is a problem in itself, as Thomas Grover pointed out.

Tictoc commented on the demographic problems facing Japan, asking whether it's a big factor in Japan. The population pyramid for Japan is not looking good at all and is showing signs of inversion. According to the Aging Vulnerability Index Japan falls in the category of countries of medium vulnerability, with a score similar to Sweden's and Germany's. The demographics in Japan are far worse than in Europe, but the safety in Japan is not particularly generous, so the overall unfunded pensions liabilities are relatively small.

Clem Snide commented on derivatives scams that are going to blow up in the future. I don't have any knowledge of these (I haven't read the book he mentions), but (to go off on a slight tangent) what amazes me is that we have not seen any big blow-ups in collateralized debt obligations. Usually the equity portion of CDO ended up being a leveraged play on high-yield bonds. With the massive widening of credit spreads and the increased defaults, I would have expected a few CDO deals to go sour by now. Yet nothing big enough has happened to make it to the papers as far as I can remember. Now that credit spreads are tightening again, the worst may be over already. Fingers crossed.

Fukui enters the stage

The world's central banks wield enormous influence over the economies they are setting interest rates for. The mistakes they make can render an entire impecunious, so the question of who runs the central banks and what the policies are is of more than just ephemeral academic interest. The worst performer of the G-7 economies has been Japan for a long time, so the question there is especially acute. Earlier this week, Japanese prime minister Koizumi announced the successor to current Bank of Japan governor Hayami. The new man is Fukui, whose profile had been steadily rising in preparation for this moment. Fukui is very much an orthodox choice, and the speculation that Koizumi might nominate someone from outside the cozy sphere of Bank of Japan or Ministry of Finance officials has thus been proved wrong. Fukui used to work at the Bank of Japan until he was forced to resign as the result of a scandal in 1998. Despite the interlude since then, which he spent as the director of the Fujitsu Research Institute, he is still very much a BoJ man. More importantly, his views aren't significantly different from those of outgoing governor Hayami. Both are opposed to any form of inflation targeting, although Fukui might be more amenable to further non-conventional monetary easing than Hayami has been. With interest rates at zero, monetary easing has to take the form of liquidity injections. The BoJ has been buying Japanese Government Bonds (JGBs) in the secondary market for some time now, but further measures that have been floated include buying more bonds, buying corporate bonds, buying foreign bonds and buying equities. Since the BoJ can create the money necessary to buy these assets at zero cost to itself, it could amass a huge amount of assets. Of course, the idea is that as the supply of yen increases, the value of the yen will fall and that the economy will reflate. This is a perilous course to take. For if the BoJ buys more JGBs, perhaps even in the primary market (thus in effect underwriting any government borrowing by monetizing it), it would eventually have the effect of squashing the yield curve as flat as a dime at zero.

There's not much chance that will happen. Fukui, like Hayami, believes that the deflation that is gripping Japan is primarily a structural phenomenon, and that it therefore cannot be cured by purely monetary means. He is likely to keep up the pressure on (or pass the buck to, depending on one's point of view) the Koizumi administration.

Two deputy governors were also nominated, Toshiro Muto and Kazumasa Iwata. The former is a Ministry of Finance official, whose current job is in the government as Cabinet Office Director General for Economic and Fiscal Management. As such he is close to both prime minister Koizumi and finance minister Takenaka. He could provide the bridge between the BoJ and the government in order to coordinate policy better. But as someone with a Ministry of Finance background Muto also tends to be hawkish on the budget, favoring fiscal consolidation rather than further deficit spending. Iwata on the other hand is an academic, who is the farthest from the Hayami orthodoxy. He has advocated on several occasions the introduction of an explicit inflation target in order to battle the deflationary spiral. So the three nominations of Fukui, Muto and Iwata represent three main reservoirs from which Koizumi could have picked his candidates: the Bank of Japan, the Ministry of Finance and academia. The much-rumored private sector candidate has not materialized.

None of these nominations are going to change the outlook for monetary policy much in the short term. Fukui's voice will be dominant and he will be able to sway the six sitting members of the BoJ Policy Board. With inflation targeting off the radar, the policy options for Japan to deal with its deflationary spiral are bank reform (and the cleanup of non-performing loans), deregulation and structural reform, yen depreciation and fiscal stimulus. Bank reform and deregulation have been making scant progress, so hoping for salvation from that front is futile. Yen depreciation is politically problematic and would not necessarily solve Japan's problems; inflation generated solely by currency effects could steer the economy into stagflation rather than new growth. Fiscal stimulus has been tried many times in the last decade and has never produced a strong enough response to pull the economy out of its slump. What we are likely to see is further policy stalemate between the BoJ and the government, with each blaming the other for the current situation.

The Koizumi administration has been in power for almost two years now, and the initial promise of reform has never been realized. There has been some progress, but no major milestones have been reached. For instance, the commission that was supposed to cut down on unnecessary road building seldom meets, which of course means that more unnecessary roads are getting built in order to fatten the pockets of the LDP's traditional construction cabal. Koizumi's popularity was grounded in the percepetion that he was different, that he was a new kind of prime minister who really would tackle Japan's problems. Now that he is proving just as impotent as his predecessors in slaying the dragon of deflation and pushing through reform, he popularity is waning. A recent Yomiuri poll put his approval rating at 49%, while Asahi put him at 44%. These numbers are down very considerably from earlier in his tenure as prime minister. Since Koizumi is an outsider within the LDP, he has no real power base with the party. The only reason why he has not been ousted yet was because he was seen as the LDP's only electoral hope. With his popularity sliding and a leadership election looming in the fall, Koizumi's position is coming under pressure. There is still a large reservoir of yearning for reform (perhaps more in the abstract than in the painfully concrete), and none of the political parties are doing a good job of addressing this. The same Yomiuri poll that showed Koizumi's sliding popularity also gave the LDP 30% of the vote. What is more striking though is that more than half of those questioned did not have a preference for any party. This shows the disconnect between the desire for reform amongst the electorate and the political leadership.

In short, it looks like the Japanese economy is not going to recovery anytime soon. The export sector is doing OK, and that is also the home of Japan's best corporate governance, with CEOs actually paying some attention to concepts such as return on capital employed, rather just blindly pursuing market share at all costs. But the prolonged slump in the Japanese economy has had repercussions far and wide. With the Japanese out of the picture, only the US and Europe remained to keep the world economy afloat after the Asian crisis of 1997. And Europe's not doing too well either. A return to health of the Japanese economy would be a boon to the entire world. Structural reforms are badly needed, as is a cleanup of the non-performing loan problem. But until the politicians in Japan can dispose of their ossified mindset, it's hard to see how such an economic revival might take place.

And that brings different dangers with it. A country that's long been suffering from poor economic performance and a general feeling of hopelessness is a fertile breeding ground for all sorts of nasty, illiberal tendencies. Creating a feeling of wounded pride and resentment is but the first step. The most extreme case of this has been Nazi Germany, which went from defeated empire to world-threatening menace in less than a decade. The situation in Japan is not as bad as it was in post WW I Germany, so such an extreme outcome is unlikely. On the other hand, Japan never faced up to its war crimes of WW II, and to this day is grossly unsensitive to the victims of its imperialist past. So what is Koizumi doing in visiting the Yasukuni shrine, where all war dead, including the worst war criminals, are honored? Is it because he's too dim to realize the effect this has abroad? Is he forced into it by the dark side of the LDP? Is it a cunning plan to inure the public, both at home and abroad, to a more militaristic Japan?

I don't know. Koizumi is hard to read. His track record as a reformer is very disappointing. He could be a ruthless opportunist who uses whatever issues he needs to stay in power. Or it's a long-term strategy planned by the darker forces in the LDP to lay the groundwork for a new, more assertive Japan in the international sphere. Having Japan play a larger role in international affairs need not be a bad thing, but a Japan that will separate itself from the West would be (insofar as we can still speak of a monolithic West these days). An arms race between Japan and China would raise tension in a part of the world that is capable of generating a large amount of economic growth and prosperity. The world is complicated enough without having another wildcard thrown into the mix; I'd much rather the Japanese continued to rely on US troops as a guarantee of their safety than have a new inimical Imperial Navy ply the seas of the orient. The missile tests by North Korea won't have helped though.

The most likely scenario is that nothing much will change in the short term. There'll be piecemeal reform efforts, more economic stagnation and not much action. As always, Japan will keep muddling on. For how much longer? That depends on the pain threshold of the Japanese electorate.

This is a joke, right?

I have been blogging about some weird stuff in Japan and the economy that's falling apart,, but I am seriously beginning to wonder whether someone's having a good laugh at gullible westerners when I read stories like this.

In a response to my previous item on bizarre Japan, reader Clem Snide mentioned the book Wisconsin Death Trip. I'd never heard of it before, but reading the description on Amazon the events in late 19th-century Wisconsin do seem to have parallels with the madness infecting Japan. If I ever get through the backlog of a few dozen books I have lined up, I may add it to my list. Compared to the Wisconsin of the time, the situation in Japan is different in two important respects: the population is much larger, which means that statistically rare events will occur in higher numbers, and secondly the improved means of communication also mean that any upwelling of weirdness gets spread much more quickly.

I'm still not sure what to think about Japan though.

More societal problems in Japan

After the bizarre stories about Japanese children, I came across reports of teenage prostitution that's thriving on the internet there. Girls as young as 13 sell themselves online, some earning several million yen (tens of thousands of dollars) in the process.

Japan's sex industry has flourished despite the country's decade-long economic slump. Prostitution was outlawed in 1956, but Japanese still spend an estimated £9 billion a year for sex.

In recent years, the spread of the Internet has led to a rise in teenage prostitution. An estimated 5 percent of girls in Tokyo's middle and high schools have turned tricks in order to buy the latest fashions.

The sex industry does not seem to be very cyclically sensitive; if more brothels were to list on stock markets, would they be classed as part of the Consumer Staples sector? I'm sure somebody at MSCI is working on the problem right now.

I do wonder what on earth is going on in Japan. That the economy is in trouble is no news, but these reports of widespread teenage prostitution among girls as well as the problem of teenage hermits leads me to wonder whether there is something more deeply going wrong with Japanese society. These things can be written off as isolated problems, but if you get enough of these things happening at the same time, the search for an underlying connecting cause (or set of causes) becomes tempting. I don't know enough about Japanese society, but there's enough cause for worry I would think. An entire society seems to be derailing itself and confronting problems is not one of Japan's strongest points.

Bizarre Japan

Continuing the Japanese flavor here, I found this disturbing story at Shoutin' Across the Pacific. I wanted to warn that there's adult content in that link, but that does not quite grasp the essence of the situation. Read at your own peril. Then also read Ron Campbell's report from the trenches.

Making friends in Japan

When going abroad I like to know at least a little about the language that I will be subjected to. In most European countries, I can usually understand something of what's spoken (with a few notable exceptions). But even when I'm not going to other places, I still like to dabble with languages. I've never been to Japan, but that hasn't stopped me from buying a number of books on the Japanese language. My favorite is Wicked Japanese, a phrasebook for business travelers. The actual phrases themselves are useless because they poke fun at the Japanese. It's a highly instructive book though, and good for many laughs. It of course depends on stereotypes for its laughs, but in most cases they do point to some underlying truth. A sample of phrases the book teaches Japanese philosophy:

Follow the hierarchy or get crushed like the October plum. Soshiki ni shitagawa naito, umeboshi mitai ni hosareru yo.

And it also gives advice how to praise disemboweling Noh actors:

How gracefully their guts fell to the floor! Harawata no kobore guai ni hin ga atta!

In case of an emergency how to describe your current whereabouts:

I am at the corner of two nameless streets! Nanashi no nihon no michi no kado ni imasu!

This is followed by phrases to explain that you're near a sushi bar or electronics store. The book also has sections explaining Japanese customs with the occasional phrase. In the unlikely case that you should get invited to someone's home, there are the obligatory compliments:

And in the living room, I am struck by the Hello Kitty motif. Ima no kitty-chan no kazaritsuke niwa kando shimashita.

The pages titled "Avoiding Ambulatory Food" give handy phrases for use in a restaurant and dealing with the very fresh ingredients:

How the honorable shrimp struggle as they choke to death! Ebi no idaina saigo desu!

Then there are the inevitable phrases for surviving in a Japanese company, such as agreeing with your superiors even if they're completely wrong. Then there's the motivational stuff for life in a Japanese company:

My dream is to be a tiny cog in a huge and honorable machine. Yumei na daigaisha no hitotsu no haguruma ni naritai.

Of course, there's much more. The book's copyright notice is from 1991, a time when the circumstances in Japan were very different. The phrase asking for a loan of 10 billion yen at 4% interest does not quite pack the same punch these days as it once did.

Even if you're not going to Japan, this is a fun book to have. (No, I'm not making any money off of this. I just thought I needed some lighter fare after all the dour and dreary economics stuff in my previous post.)

Kampai!

Japan's two faces

Some time ago, Samizdata linked to "Is Japan Faking It?", an essay by Eamonn Fingleton arguing that Japan's problems were nowhere near as bad as we here in the west seem to think. It's about as contrarian as you can get these days without completely losing sight of reality, but it was worthwhile reading nonetheless. Not because I agree with it, but because it's plausible enough to be true, which in turn forces you to think about what's really going on the Japanese economy. It is certainly true that the reflexive reaction to Japan now consists of chanting the from the Holy Basketcases Hymnbook, starting with "All Debts Great and Small." This is an abrogation of thought and analysis in favor of convenience. I too have often been guilty of this, so I took Fingleton's article as a starting point for re-examining Japan, focusing in on some of the out-of-consensus calls he makes.

In terms of fundamental data, I find the article wanting. To get an overview of macroeconomic data, I highly recommend the OECD's database. All data I will be using here is taking from the spreadsheets you can download from that page, unless otherwise noted. To start, there's this claim in Fingleton's article:

The latest "disaster" is Japan's allegedly out-of-control government spending. But Japan's budget problems are grossly exaggerated. OECD figures show that in the first eight years of the 1990s, Japan actually ran large budget surpluses. Since then the government's position has deteriorated somewhat but is still no worse than many other nations.

This is relatively easy to find in the OECD data, and it's simply not true. This graph shows the government balances as a percentage of nominal GDP for the US, Eurozone, UK and Japan. As you can see, Japan has been running a budget deficit since 1993. This also holds true if you look at the other OECD budgetary indicators, such as cyclically adjusted deficits and the primary budget balance. This latter is the deficit the government is running excluding debt servicing. The very low interest rates that the Japanese government is paying on its debt have kept debt servicing from becoming an additional problem. Even looking at gross or net financial liabilities his line of reasoning does not hold up. The footnotes the OECD provides in its spreadsheets note that these latter number are not necessarily comparable across countries due to differing methodology. Still, even if the level is not perfectly comparable, the first derivative is. Fingleton also claims that:

Living standards increased markedly in Japan in the so-called "lost decade" of the 1990s, so much so that the Japanese people are now among the world's richest consumers.

Japan's consumer have been amongst the world's richest, although perhaps not on a purchasing power parity basis. However, the OECD does provide data on this as well. Net household wealth as a percentage of disposable income has been shrinking in Japan over the last decade. What's missing here are the disposable income numbers, and unfortunately the OECD does not provide them. However, this data we can find in the Statistical Handbook of Japan 2002. Scroll down to figure 12.2, where you will see that real disposable personal income saw its last significant increase in 1991, and even that was less than 2%. In comparison, real DPI in the US has been growing at a 3-6% pace over the last ten years. So here too Japan has been losing ground, rather gaining it.

Another aspect of Fingleton's case rests on Japan's superior trade performance during the 1990's. He points out that the trade surplus has risen by a factor of 2.4 since 1990. Japan's current account is also showing a healthy surplus, while the Japanese savings rate is the envy of the industrialized world at 8.7% according to Fingleton, while the OECD data puts it even higher. There is a trap in talking about trade balances in terms of "surplus" and "deficit" as I have done just now (and as is usually done) because those terms have connotations of "good" and "bad." The trap is that a trade deficit is not necessarily a bad thing. It depends on the circumstances. Let's scale the example down to a household. As a result of the job you're doing, you add to your hoard of little green bits of paper. Now suppose you decide you need a new hammer. You could go to a mine, get your own iron ore, smelt it, bang it into shape and use wood you cut down to make a hammer out of it. Chances are you're going to go to yuor hardware store and choose from one of dozens of hammers someone else has produced for you. In order to obtain the hammer legally, you then hand over some piece of green paper to the store and go back home with your new hammer. You've just increased your personal trade deficit. Unless you sell more goods than you buy, you have a trade deficit. Cause for panic? Not really, as long as you continue to earn enough bits of green paper to finance your trade deficit. This applies in a wider sense to the US economy as well: as long as the sum total of value added in the US economy grows sufficiently to finance the purchases from abroad, there is not a problem. Americans give green pieces of paper to the Japanese and get shiny consumer goods in return. It's the aggregate wealth of the US economy that has made this possible. To keep this working, not only has the US economy to produce enough wealth, but it also requires a continued willingness of the part of the Japanese to trade shiny consumer goods for green pieces of paper. As long as they're happy to do that, there is no problem and both sides benefit.

A similar story also applies to the current account balance, where again the US is importing capital while Japan is exporting it. In essence, the low savings rate in the US is compensated in part by the Japanese sending their money to the US. This is one of the things Fingleton points out as a positive for Japan. The large capital outflows indeed enable the Japanese to buy stuff abroad. But they're not doing it because they want trophies on their mantlepieces (well some of them might), but because they want to earn money. And because they're sending their capital to the US, they're also giving an implicit vote of no confidence in the Japanese economy. Actions speak louder than words, and these actions mean that the Japanese think they can get a higher return on their capital if it is invested in the US than in Japan. So the current deficit could become a problem if for instance another region in the world gets its act together and becomes the preferred destination for international capital. This does not seem likely in the very short term, but you never know. Congress could suddenly raise taxes or pass regulatory bills that affect American companies' competitiveness, and money might go elsewhere. Right now, America is still the default place to invest your money though.

The high savings rate in Japan is extolled by Fingleton as a great positive. It could be, but it isn't. And the reason for that is the broken banking system. The people are saving money, but the banks aren't lending. One of the key tasks of a healthy banking system is to provide risk capital to entrepreneurs, and this is simply not happening in Japan. The banking system is seriously broken; the Bank of Japan has been printing money (metaphorically) at a tremendous rate. The monetary base has been expanding at a 30% year-on-year rate for some time now, but the broader monetary aggregates are not picking it up. M3 and M4 are growing at 1 to 2% year-on-year. So despite the creation of large amounts of additional yen, this is percolating into the broader economy. The money multiplier is dead in Japan for now. And that's because both the banks and industry are in a mess. As a final comment on the high savings rate, it should be pointed out that Japanese savers are getting virtually no nominal return on their savings, and haven't been getting return for many years now. The Zero Interest Rate Policy of the Bank of Japan has ensured that both lending and borrowing rates are very low. The real return on cash is slightly positive, but it's still puzzling that the Japanese would be so risk-averse as to put so much of their income into an essentially dead asset. As Fingleton points out, the net national savings position of Japan is considerably lower than the government's, if you count personal savings too. So he's right that there is no solvency issue at the moment, but that's looking at the country as a whole. If interest rates ever go up, the debt servicing burden on the government will become very onerous very quickly. Sure, Japan can afford it, but only by transferring money from private to public coffers. This means taking money away from the consumers and giving it to the government by taxation. This is not going be popular or short-term positive for the economy. What we're seeing is perhaps a case of Ricardian equivalance, which states that the timing of how government debt is financed has no impact on the real economy. So whether you tax now or issue debt now (to be paid later) makes no difference. A perpetuity of $50 at 5% interest has a present value of $1000. So whether you pay $1000 in tax now or $50 in perpetuity makes no difference. But the people who'll be paying off the debt will in the end be the children of the people who issued the debt and presumably benefited from it. So an intergenerationally altruistic household will put the $1000 in non-levied taxes to buy the bonds issued and then use the coupon income to pay the $50 perpetuity. Do real people really think like this? There is some evidence that in the aggregate the expectations of future taxes are influenced by current debt issuance and levels. So a high savings rate would not be a surprise in such a context.

If the monetary base is expanding so rapidly but broad money supply isn't, where is the money going then? It's certainly not going to Japanese consumers, nor does Japanese industry seem to be benefiting much from it either. It's not going into real estate or land, nor is the stock market benefiting. Instead, the money is going into funding the JGB bubble. JGBs (Japanese Government Bonds) have real yields that are surprisingly low for a country with a fiscal position as dire as Japan's. It's partially due to the structure of the Japanese savings system, which tends to invest disproportionately in JGBs, as well as the printing of money by the Bank of Japan. At some point, this bubble will have to burst, just like the Dot-Com Bubble in the US and Europe burst.

One last point of criticism of Fingleton's piece is his comparison of the deflation currently rampaging through Japan and the US experience in the latter half of the 19th century. There are some significant differences between the two situations. First and foremost is the structure of the economies. Even back then, the United States was attracting foreign direct investment (FDI) to finance the growth of the economy. In fact, the United States has pretty much throughout its history run trade deficits, with the exception of the depression years of the 1930's. (Sorry, couldn't find a link). While the US was importing capital, Japan is exporting it now. Furthermore, he quotes LaFeber as saying that the 25 years to 1897 were "economic hell" because of persistent deflation. The date chosen is no coincidence, as that is the year in which the US returned to the gold standard at the pre-civil war parity. During the war, the US had three currencies: the greenback, the Confederate dollar and the yellowback. The yellowback was the original US dollar backed by gold and continued to be used in the West. Both the greenback and the Confederate dollar were fiat currencies (i.e. not backed by gold or any other metal. Virtually all currencies now are fiat money). After the war, the greenback and the yellowback needed to converge again, and this process took till 1897. It took so long because to restore the price level more quickly would have caused a massive recession. This long period of deflation was engineered and deliberate, and the US economy grew during the period. Japan's economy has not grown much in the last ten years. (Data taken from this dataset compiled by NBER's MacroHistory project. More information on post-civil war currencies can be found here. Inflation data downloaded from Global Financial Data.)

I'm not impressed with Fingleton's case. Japan's economy does have serious problems, and I simply don't buy his analysis. However, this article is title Japan's Two Faces, and that's where I think he does have a point, although it is not as controversion or contrarian as his call on the economy. There are some really, really good Japanese companies, and they've been doing pretty damn well over the last ten years (and before too). Some of them are well-known names in the West, such as Toyota and Sony. Others are doing well again after having come to the brink of collapse; Nissan had to be rescued by the French, for instance. Japan's corporate landscape shows a mixed picture. In general, the companies doing best are those that have been exposed in full force to the rigors of the international marketplace. That forced them to become well-run, modern companies, exactly the kind that the rest of Japan is still lacking. As the Japanese market becomes more open (and not just to Chinese imports) and red tape is slowly abolished, market mechanisms will force more Japanese companies to become competitive again or face death. As long as bank are not willing to foreclose on non-performing loans though, this is not going to happen. So it's certainly not all gloom and doom in Japan. But it's exactly that part of the Japanese economy that has been most exposed to Western-style free markets that is doing best. Japan has a deep base of knowledge and excellence in products that need to be unleashed, quite literally. As long as the arcane, indeed pre-capitalist, structures and linkage continue to prevail, the spread of Good Companies in Japan will remain limited. The risk is rather that the bad, zombie companies will infect the good ones by undercutting them. If you're essentially dead and have no hope of paying off your debts, why not sell below cost? At least you'll get market share and you can pretend to be alive for a bit longer. Good companies are then forced to compete with the zombies, and can't last very long usually. Bankruptcies are sorely needed in Japan.

Not all of Fingleton's arguments are on the mark in the company area either. For instance, the supercomputing lead Japan has is not directly related to manufacturing expertise. Rather, the US and Japan took differing approaches to supercomputing about a decade ago. US researchers thought that by bundling together lots of cheap computers, you could create a cost-effective machine that is very fast. The Japanese continued the "old-style" supercomputing tradition, which has proven superior.

Finally, where Fingleton goes off into fantasy land is when he posits that the Japanese have deliberately been talking of crisis to get the rest of the world off their backs. It's supposed to be part of a centuries-spanning plan that would put Asia back in the number one position in the world, having been supplanted by the West, and specifically the US. That's just nonsense. Japan is not welcoming China's exports "with open arms," but instead there's an enormous amount of bellyaching about Chinese exports. Japanese versions of Ross Perot with their Giant Sucking Sounds are popping up all over the place. Instead what's happening is that Japanese companies are trying to create better profit margins, and that means shifting commoditized manufacturing offshore to China, which is becoming Japan's reservoir of cheap labor. It's benefiting both countries, of course: Chinese become wealthier and Japanese companies become more efficient. But the adjustment process is painful. Rather than a sinister long-term plot, it's just another sign that Japan is slowly rejoining the world economy by opening up a bit. It's becoming more western, more free-market, even if only at the margin. There is a core of good companies upon which Japan can build to try to regain its economic strength. It's up to the Japanese government to take further action in liberalizing the Japanese economy and opening it up to market forces.

A very Japanese problem

Even I did not spend all day tinkering with my computer, as I managed to hop over to the couch and watch some TV. On BBC 2 tonight's edition of Correspondent focused in on a very Japanese problem: hikokimori, or the wave of teenage hermits that are popping up in Japan. What happens is that teenagers, usually male, close themselves into their rooms and stay there for years. Only in Japan could this happen.

It's a combination of parents putting extreme pressure on their children to succeed by forcing them to attend "cram schools," where kids go after school on weekdays and during weekends. The program showed some footage of a 3-day cram camp, where 13-year olds were kept up in class till 10 PM, after which they had to do an exam. Those who failed, had to do it over. And over. And over. Until they passed (or passed out?). The last kid went to sleep well after midnight. It's a system that is designed to bestow status by passing exams; actual practical merit, achievement or learning is irrelevant. Taking exams is not a test of knowledge learnt; it's just a test of how well you can pass certain kinds of exams.

So that's one part of it. The other part is the parents' reaction when their son decides to lock himself up. They showed footage of several households with a reclusive child. In one, a kid had locked himself up in the kitchen for three years. What was the parents' reaction? They started off by ordering food, and then broke down and built a new kitchen! How fucking insane is that? You could even hear the kid (now 17) playing video games in the old kitchen. Another instance was shown where they ominously declared that no-one knows how he eats or drinks. Then later, the mother was speaking and said she had a job during the day... well, guess what? The house is empty during the day. Perhaps he sneaks into the kitchen while there's no-one about? And finally, they managed to interview a less reclusive recluse, who had not left his room for a few years. His mother keeps putting trays of food at his door, and he was filmed eating dinner in his room. It was very neat and tidy. When asked what he does all day, he said he listens to CD's (he had a big stack), and playing games on his Playstation 2. And he orders stuff from the Internet. His parents are very conscientious in making sure he has everything he needs, yet he won't so much as talk to them. He says communicating is really hard.

Is it just me, or is the solution blazingly obvious? Cut off his food, drink, money and electricity. Throw the circuit breaker. He'll come out when he's hungry and thirsty, and then you can have a good talk to him. I mean, jeeez folks... this really isn't rocket science, is it? The truly amazing thing is that so many Japanese parents refuse to parent. The conflict-aversion in Japanese society is apparently so deeply rooted that even in such cases, where the solution is ridiculously clear, they still won't take the required action. Cue for parallels with Japanese economic malaise. It's also interesting to see that this parenting failure is cast as a psychological problem of the teenage hermits. Hikokimori is a disease, they say. I think it is, but it's a societal disease rather than an individual one.

One point the program missed completely is the actual numbers involved, or rather the implications of the numbers. In a population of around 130 million, they claimed that there are now more than a million teenage hermits. The Japanese population pyramid is already dangerously imbalanced, and losing a large part of the working-age population is going make the woes of the Japanese economy even worse. The dependency ratio (those retired relative to working age) is already one of the highest in the industrialized world, and the projections show it getting much worse in the next 50 years. Unfortunately, the site linked to above does not show the actual numbers per age band in a table, just the graph. So it's a bit imprecise, but assuming there are about 800,000 per sex in each one-year band in the 2000 numbers for ages 10-20, we end up with a total population aged 10-20 of around 16 million. If indeed one million kids are now living as domestic, well-fed, Playstationed hermits, that works out at 6.25% of the total, or more worryingly, 12.5% of the male population. That's pretty scary. There are of course waster kids in the West too, but having one sixteenth of your youth locked in voluntary confinement is a sign of a deeply dysfunctional society. And as I said before, the economic consequences will be dire; they're going to be uneducated, unmotivated and thinking they can get away with outrageous behavior. The loss of such a large percentage of the future working population would be an economic cataclysm in itself, but coming on top of the malaise of the Japanese economy, words begin to fail. Perhaps it's indeed easier to do what the Japanese do when faced with the economic and demographic abyss of their future: pretend it's not there. Ignore it. Hope it'll go away. Stay quiet. Don't rock the boat. All will be well. Consensus above all. No conflict please, we're Japanese.

UPDATE: I should have added this sooner, but Ron Campbell has more background on Japanese culture.