Japan's jump to the right a concern
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