Bernard Hickey details 5 reasons why developed economies are sliding into a Japanese-style stagnation. Will NZ follow too? Your view?
By Bernard Hickey
Older readers will remember a catchy tune released by The Vapours in 1980 called 'Turning Japanese'. It was a one hit wonder, but it's a song many economists and central bankers are finding themselves humming at the moment.
That's because many developed economies appear to be sliding into a Japanese-style slump.
Japan's property market boomed in the late 1980s then bust spectacularly in the early 1990s. Japan's stock market has fallen around 70% since then and its total economic output is now actually lower in nominal terms than it was in early 1990s. Over the following 10 years the Bank of Japan slashed its interest rate to zero and held it there. An ageing population became increasingly worried about stocks and property so they invested more of their savings in government bonds, driving long term interest rates to 1%.
Japanese banks and some companies became zombies that either couldn't lend or invest because they did not have enough capital or were afraid to lend or invest because of slow economic growth and falling asset prices. Japan's politicians kept spending more and more on 'Bridges to Nowhere' and propping up zombie banks. Many economists believe the only reason Japan didn't slide into a full depression was the growth of its biggest neighbour China and exports to a fast growing America through the 1990s and early 2000s.
Now the developed economies of America and Europe are starting show a few Japanese symptoms with persistently slow growth and falling interest rates. New Zealand isn't quite as bad yet, but may join them if the problem can't be solved quickly.
Here's 5 reasons why they're turning Japanese:
Ageing populations
Japan's reluctance to allow in immigrants and a surge of older workers heading for retirement saw many salt away savings into term deposit accounts or bonds rather than invest their money in stocks or spend it. Similar trends are emerging, particularly in 'older' Europe and the United States. A political drive to reduce immigration because of high unemployment will worsen the demographic drag.
Zombie banks
More than US$2 trillion of cash is sitting in the term deposit accounts of American banks, many of whom are still repairing their balance sheets after the disastrous near collapses and bailouts of late 2008. This hoarding of cash is self-reinforcing, as low investment slows growth and increases the risk of future investments or lending. A refusal to let rotten banks fail allowed many to stagger on, sucking up resources, but also failing to lend or invest.
Hollowed out middle classes
An explosion of trade and outsourcing has allowed many multi-nationals to cut costs by sacking middle managers and highly paid manufacturing workers in developed economies. The benefits of that cost cutting has been shifted to shareholders in the form of higher profits and dividends. These shareholders, who tend to be richer, are less likely to spend that money, reducing the circulation of that money and in turn reducing growth as consumption and reinvestment shrivels. Much of this money is hoarded in the lowest-risk government bonds.
Financial repression
The heavily indebted nature of these developed economies has forced central banks and governments to hold down short and long term interest rates to avoid economic collapses and to avoid governments going bankrupt. Governments force pension funds and banks to buy their bonds and keep long term interest rates low, while central banks cut cash rates to near 0% in vain attempts to fire up economic growth and to keep banks on life support.
Political disunity
Divided political systems where leaders either choose or find it very difficult to change polices make it very difficult for economies to dig themselves out of the morass. Vested interests in bureaucracies or from corporate backers can often block change, even in democracies.
Can New Zealand avoid this fate?
Our population is ageing, but not as fast or as much as in Japan because we allow immigration. Its banks are not zombies and our middle classes are not as hollowed out as in America, although there are some signs it has started. We have yet to see financial repression, but it is one strategy central bankers and politicians like, because it maintains the status quo.
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