How Japan can turn the tables on its economic decline
After the Black Ships appeared off Yokosuka in 1853, the Japanese made every effort to import the advances and discoveries of the West. But one of the few Occidental innovations they neglected to acquire was a proper understanding of economics. So when the country had its famous economic miracle, it was more down to luck than design. And since the early ’90s, luck has been in very short supply.
The thing that really powered Japan’s economic miracle, apart from a low dependency ratio (i.e., a population with few old people and a rapidly falling birth rate, typical of most take-off economies), was the low value of the yen. From 1949 to 1971, the yen was fixed at 360 to the dollar, meaning that Japanese exports were ridiculously good value in foreign markets, while anything from abroad was regarded as a “luxury.” This situation led to the establishment of the massive export-driven industries that still dominate the J-conomy.
When these industries do well, Japan does well, but, of course, with the ever-rising yen, they haven’t been doing well. Japanese companies now survive by outsourcing more and more production to other countries, most notably China, a process that ultimately exports the technology and techniques they rely on, and which spawns the foreign competitors that will undersell and ultimately drive them out of business. In short, the nation is in the process of digging its own economic grave, and the harder it works, the deeper the hole gets. This is the result of a profound lack of economic understanding.
So what can Japan do? Unfortunately, inventing a time machine and setting the controls for pre-1971 is not an option. At the same time, getting back to a devalued yen would clearly be a good idea—especially now that everyone has enough Louis Vuitton handbags and the novelty of Beaujolais Nouveau has worn off.
But how to do this? Nations like Zimbabwe have no problem. They just leave the printing presses switched on overnight and, when they open up the mint in the morning, a few more zeros have been added to the currency. But this is probably not such a good idea for a country like Japan that imports most of its food.
A subtler method is to have a behaviourally erratic finance minister. Back in 2009, the then incumbent Shoichi Nakagawa was doing a great job undermining confidence in the yen by dozing off in front of cameras and groping statues at a G7 finance ministers’ get-together in Rome. But just when there was about to be a beneficial run on the yen, the PM foolishly sacked him.
Japan can probably learn the most from a country whose economy is rather similar: Germany. Like Japan, Germany is a massive, high-quality exporter, and until quite recently was caught in the same vicious trap of an ever-rising currency. The more German companies exported, the more foreign currency they received, but the less that currency was worth as the Deutschmark soared. This in turn led to falling corporate profits, which spurred efforts to increase exports, which only exacerbated the situation—a classic catch-22. However, unlike their Japanese counterparts, the Germans know a thing or two about economics. That is why they invented the Euro.
At the moment, with the Euro in apparent crisis, to praise this trans-national currency sounds like errant madness. But this ignores the fact that the Euro’s real purpose is to stop German exporters being hit by currency overvaluation. By sharing their currency with less awe-inspiring economies, the Germans have gained the economic ballast to escape the trap that Japan is in.
In fact, the more talk of crisis in Greece or Ireland the better, because it keeps the Euro at a profitable level for German exporters. This is why, amid the stories of Greek and Irish panic, Germany is enjoying a boom with near full employment and soaring exports, and business confidence is at a 20-year high. Now that’s an economic miracle!
The lesson for Japan is clear: it, too, needs to pursue monetary union to ensure that it is not destroyed by its own success. While Germany has the shaky economies of its neighbors to provide the necessary ballast and bad PR, Japan must join its economy with those of its more disreputable neighbors.
But the great thing about any Far Eastern version of the Euro is that the obvious name—the “Asio”—has just the right connotation of ass-like stupidity.
This commentary originally appeared in Metropolis magazine (www.metropolis.co.jp).