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Japan's jump to the right a concern

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Michael Pascoe: Japan a go-go

What will be the outcome of Japan embarking on a massive stimulus gamble after a couple of decades in the doldrums?

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A little history lesson in The Economist magazine last week reminded readers that the Japanese Prime Minister, Shinzo Abe, was the son of a former Japanese foreign minister and grandon of Nobusuke Kishi. Kishi was a prime minister and a member of the Japanese cabinet that declared war on the US. He spent three years in jail as a suspected war criminal, was the senior bureaucrat in Manchuria from 1936 to 1939 when Japan occupied it, and is Shinzo's political hero.

Filial and grand-filial loyalties run deep in Japan. It's just one of the reasons there are concerns about Japan's jump to the right with Abe's election. He has the numbers and perhaps the experience to attempt more in his second term of government.

It's a big gamble for a government that already runs on an unsustainable funding model. 

The politics of chopstick rattling over a few isolated rocks in the East China Sea are another complication in considering the Abe government's big stimulus gamble, highlighted this week by the Bank of Japan's announcement of open-ended money printing and moving from an inflation goal of 1 per cent to an inflation target of 2 per cent.

Along with Abe's pledge of increased fiscal stimulus – yet more infrastructure spending that inevitably comes with suspicions about more bridges to nowhere – a massive amount of money is being thrown at trying to blow Japan out of a couple of decades in the doldrums.

The column by Ambrose Evans-Pritchard this week on Japan's economic revolution rocking the world gained plenty of attention from Fairfax readers. But with the dust settling on the Bank of Japan's announcement, it's time to better consider the local impact and what was missing.

In the short term, the stimulus package is generally considered a good thing for the global economy – and for Australia – despite being an escalation of the currency wars.

In the medium term, it's a big gamble for a government that already runs on an unsustainable funding model, a level of indebtedness and spending that makes the Greeks and Americans look frugal.

Reflation can be a good thing for a country bogged down by deflation, but only if it works and the patient can eventually be weaned off the drug.

And, in the longer medium term, I hope I'm wrong in thinking it has to fail because all three arms of policy would have to be headed in the right direction to overcome the mind-numbing extent of government debt.

The forgotten third arm of government policy is population. In Australia, migration levels are an obvious policy tool, even if our politicians don't like to talk about it. Being able to manipulate the supply of labour and consumers can be a handy thing to covertly support monetary and fiscal policies.

But Japan's people policy is a rolling disaster. The population is already shrinking. There will be 25 per cent fewer Japanese in Japan by 2050. Not only is a quarter of the population aged over 65, increasing numbers of Japanese women are deciding they don't want to marry Japanese men and have their children.

And Japan's xenophobia means immigration is not on. The ageing population means retirees' massive savings are starting to be drawn down, depriving the government of one source of its massive borrowings. Quite simply, Tokyo cannot go on indefinitely borrowing more than it raises in taxes.

So, for all the immediate market enthusiasm for Japanese reflation, the further outlook remains a worry, one made worse by the jump to the right. There's a history of countries turning to military spending as they try to reflate out of depression.

That China and Japan are Australia's two biggest trading partners makes this rather important to Australia. We shouldn't be surprised when a Chinese colonel on the make starts warning Australia to be a peaceful lamb, ignoring the American tiger and Japanese wolf. It becomes harder by the day to pretend America's "pivot to Asia" is anything other than an old-fashioned containment policy. Better to be a smart kangaroo and hop right out of it.

Michael Pascoe is a BusinessDay contributing editor

12 comments

  • "Better to be a smart kangaroo and hop right out of it"

    Wise words, but the kangaroo has long since been caged by its 'friend'

    Commenter
    Tee
    Location
    Sydney
    Date and time
    January 25, 2013, 2:16PM
    • By hop right out of it, where do we hop to? Mars?

      We're all in this together - Good friends with the Americans, we get along well with China and Japan, we-re selling them everything we can pull out of the ground.

      One Chinese Colonel doing his usual sabre-rattling routine shouldn't even make the news.

      There's no change to anything required at this stage.

      But your main point - Japan - I live there and unlike Australia - they do have to change things. A lurch to the right is risky, but it has been done before and pulled them out of the 1930's depression, and it looks to be what Abe is moving to do. He could also impose the sales taxes that have been talked about forever and never acted on. Problem there is people would buy even less, and that doesn't help.

      Commenter
      Jules
      Date and time
      January 25, 2013, 2:32PM
      • Im with you Michael

        This policy which has the potential to be benificial requires focussed and astute management of the economy boith supply and demand side for atleast a generation for it to work.

        How long does the average government last in Japan? i know for 40 years or so thye all came from the same party but the actual PM and elected leaders dont handg round for long.

        The cultural challenges you have outlined dont paint a picture of a hands on focussed long term government that will hold a steady tiller and be able to manage growth closely if an when it comes. I suggest that strong inflation is their reel aim. thats one way to rapidly reduce the cost and size of thier debt.

        Mix all that with a government hell bent in resuurecting their well run nuclear program and I would be betting on the japanese to save the global economy over the long term!

        Commenter
        Andrew
        Location
        Sydney
        Date and time
        January 25, 2013, 2:34PM
        • "... hop right out of it"

          How? At some point we're going to have to pick between the geopolitical ambitions of the USA and China.

          Commenter
          frankenfurter
          Location
          sydney
          Date and time
          January 25, 2013, 2:53PM
          • Debt to GDP metric takes no account of the assets, think things like Government owned Japan Post( by some metrics the largest bank in the world) other assets on the J gov balance sheet things like majority ownership Japan tobacco etc..
            Japan is also one of the largest foreign creditors in the world.
            This aint exactly Greece and unlike Greece Japan is a monetary soverign nation so they can print like Benanke if they wish and are free to do so, after all they dearly need a weaker Yen.
            No doubt Japan has many issues but some of this is somewhat overstated and oversimplified.

            Commenter
            To be fair
            Date and time
            January 25, 2013, 2:59PM
            • Japan is the most fascinating culture on the planet imho. It will be interesting to see how they go in coming years. The challenges are immense but they have some distinct characteristics that equip them better than any other nation to confront the challenges ahead. We on the other hand are in the most precarious position of any country if it all goes pear shaped.

              Commenter
              Brisbane Bear
              Location
              Brisbane
              Date and time
              January 25, 2013, 3:01PM
              • The region needs Japan to rebuild their arm forces and being a regional military power to combat the greed of the Chinese. China is bullying all the smaller nations in the region in an exercise of territory grab in the east sea and yet no media organization or government in Australia say anything about it because the Chinese is our best customer. At least Japan is not ruled by a tyrannical communist party whose only concern is their personal bank balances. Soon the Chinese will take what they want and it will be too late!

                Commenter
                Tom
                Date and time
                January 25, 2013, 3:03PM
                • A bit confused, Mike. The syphilitic 'sins of the father' argument against Abe is a bit weak to start with and goes nowhere. Mind you, ANY move to the right anywhere is always a problem now economically and socially.

                  Followed by plaintive economic orthodoxy, which historically is characterised by its inherent failure. Just look at Japan, because I can recall 20 or so years ago when columnists (Pascoe himself?) lauded Japan's 'economic miracle' and were blind to the future (yes, I know economics is only a retrospective science, but do the commentators?).

                  Mad growth for its own sake will always fail, whether the limit is population, running down and exhaustion of resources, bubbles and excesses in funny money (banking, house prices etc) and more. Pumping population (perhaps they need a Costello baby bonus as sound fiscal policy) will only exacerbate some other problem. It's tricky, but a new model is needed.

                  Then there is some sensible advice about ending the cultural cringe towards the USA. Not to grease up to China, hopefully, but to be independent.

                  Commenter
                  Uncle Ho HO
                  Date and time
                  January 25, 2013, 3:05PM
                  • I notice China wasnt throwing its way around about the islands when Japan was it largest source of ODA (by some accounts hundreds of Billions) over the last four decades. Funny that..

                    Hopefuly it will go to the ICJ and whovever loses accepts the umpire decision.

                    Commenter
                    Soap on a rope
                    Date and time
                    January 25, 2013, 3:18PM
                    • "Chopstick rattling"?! For heaven's sake...

                      Commenter
                      Blimp
                      Location
                      Brisbane
                      Date and time
                      January 25, 2013, 4:06PM

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