Satyajit Das: Japan's tactics look too aggressive and doomed to fail
Economic View: Prime Minister Abe's wider agenda is turning out to have global implications
Friday 13 September 2013
Years of disappointing economic data and moribund policy meant that it was fashionable to dismiss Japan. The aggressive initiatives of the new government under its prime minister Shinzo Abe, termed "Abe-nomics", have drawn global attention.
A deep-seated nationalism and patriotism is driving Mr Abe's policies. Since Commodore Perry used military power to force it to open up to the West, Japan's obsession has been to be recognised as a first-ranking country – itto koku. Japan went to war to avoid being reduced to a second-rate or worse country. In the aftermath of its defeat, the term yonto koku (meaning fourth-rate country) was widely used to represent Japan's post-surrender decline and humiliation.
Mr Abe's initiatives are designed to reverse economic weakness and restore Japan's status. Their success or failure will have global implications.
Japan remains the world's third-largest economy after the US and China. It is also financially significant, being a major supplier of capital to the world. The country's large foreign-asset holdings, totalling around $4trn (£2.5trn), make it the world's biggest net international creditor.
A Japanese recovery would assist the global economy and generate demand for imports. It would also continue to be a source of capital to the rest of the world.
Failure would be equally significant. If growth does not pick up then a combination of budget and trade deficits that require financing would affect the global economy. Japan's overall current account may move into deficit as soon as 2015. Japan would gradually run down its overseas investments, selling foreign assets and repatriating the capital. The selling pressure would affect prices and rates for a wide range of assets, transmitting financial market volatility.
Irrespective of the eventual outcome of Abe-nomics, Japan's aggressive monetary policy may lead to large outflows of private capital from Japan into foreign markets, with destabilising side-effects.
In the 1990s, aggressive interest rate cuts in Japan in the aftermath of the end of its bubble economy led to a large and rapid outflow of capital, fuelling a rapid increase in debt levels, which was one of the factors underlying the Asian monetary crisis of 1997-1998. The risk of a repeat has increased.
The devaluation of the yen against other Asian currencies increases Japanese export competitiveness but at the expense of China, South Korea and Taiwan, who may intervene in foreign exchange markets to reduce the appreciation of their currencies.
The prime minister's wider political agenda also has global implications. These include changes to overturn Japan's Western-imposed constitution, an increase in defence spending and abrogation of its limited rights to self-defence.
This complicates Japan's position. The territorial dispute with China has exacerbated the decline in exports and damaged its extensive economic investments and interests in China. Resurgent Japanese nationalism creates unease among many Asian countries who remember its militarism and wartime atrocities, and is likely to be met by nationalism on the part of its neighbours.
Mr Abe's programme is reminiscent of another episode of Japanese history – the kamikaze or "divine wind". By the end of World War Two, having suffered crucial military reversals and with its declining economy increasingly unable to support the war effort, Japan used kamikaze attacks against Allied shipping where pilots literally crashed their planes into the target.
A total of 4,000 kamikaze pilots died. But the poor success rate (only a small number of attacks hit their target) was not able to change the course of the war.
The attacks were based on tradition and culture, embodied in the samurai and Bushido code of conduct, where death is preferable to the shame of defeat.
The current policy has a desperate, kamikaze element. Like the war efforts, it is unlikely to succeed in changing Japan's economic trajectory.
Satyajit Das is a former banker and author of 'Extreme Money' and 'Traders, Guns & Money'
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