Fear of the Future, 18 Years On
by Adrian Ash
BullionVault
Monday, 25 June 2007
"...If depression is short-hand for fear of the future, then here's a glimpse of what lies beyond today's bubble in credit,
debt and financial confidence..."
YOU COULD KNOW less than even the British government about trading gold and foreign currencies for profit, but
you'd still have to reckon the money of this mystery country a "buy":
>> Its jobless rate just hit a 9-year low of 3.8%, and there's plenty more growth to come. The ratio of jobs to
jobseekers rose yet again last month.
>> It has one of the best-educated populations outside Singapore. Indeed, the Economist magazine calls it
"the world's most innovative nation"; per head of population, it holds more patents than anywhere else.
>> After a decade of recession, our mystery country has now enjoyed five years of unbroken growth – the
longest economic expansion since WWII. It also stands as the world's biggest creditor country, the exact
opposite of America's empire of debt. Its exports to Europe alone rose by nearly 18% in May from a year
earlier.
>> In the financial markets, its yield curve now points sharply higher, shouting to anyone who'll listen that
interest rates are set to rise. Two-year bonds are already paying more yield today than they have in a
decade.
What's not to want?
But the trouble remains that this country is called Japan – and shaking off its post-bubble depression is proving
harder than anyone could ever have guessed. After the almighty credit-fuelled top in Tokyo stocks and Japanese real
estate of 1989, the world's second-largest economy remains a basket case.
Far from enjoying huge capital inflows, as Bloomberg reports, "the Japanese Yen is down 6.6% versus the US Dollar
and more than 12% versus the Euro in the last 12 months." It's flirting with a two-decade low against Sterling.
Measured against gold, the Yen hasn't bought so little since April 1985. It's dropped by more than one-half in the last
two years alone.
Yet despite the Yen's incredible vanishing trick on the foreign exchange market, its purchasing power at home
continues to rise. Such a phenomenom may seem weird, even alien, to anyone living and investing outside Japan. It
up-ends the natural law that makes prices go up, little by little, with each day that passes. Here in West London, for
instance, the staff of BullionVault now find a shop selling chocolate bars for less than 45 pence (90¢), no matter how
small – not even a Kit-Kat! London's train stations, meantime, no longer sell any kind of liquid to thirsty commuters,
not even a bottle of water, for less than £1.19 ($2.38).
But in Japan prices keep falling instead of rising, and this aberration has been in effect for more than 12 years. In
spite of losing nearly a fifth of its Dollar value since the start of 2005, the Yen now buys more – not less – than it used
to.
Yes, prices had a long way to fall thanks to the Japan's bubble in credit of the late '80s – and Japan is still home to
two of the world's ten most expensive cities (Tokyo at No.4 and Osaka at No.8). But Japanese consumer prices
including energy costs are falling at an annual rate of 0.2%. And for the poor Japanese schleps trying to make a
living, this "deflation" in the cost of living still brings no blessings. Because wages are falling faster than prices.
Household disposable income in Japan dropped 0.4% in the year to April – even though the economy expanded by
2% annually. In fact, hourly wage-rates are now amongst the lowest in the developed world according to Tsuyoshi
Takagi, president of Japan’s biggest trade union, Rengo.
The reason? Post-bubble it's simple enough; more than four million full-time jobs were lost during the previous
government's tenure alone. More than 400,000 women joined the workforce last year, but many went part-time only.
Now Rengo is demanding a ¥50 increase in the minimum wage, taking it up to ¥650 per hour...less than $5.25 per
hour. And this in a country where you can pay $10 for a coffee – and a weak, tasteless coffee at that.
How to stimulate incomes and spending 18 years after the bubble went bang? The Bank of Japan has already done
all it can to stimulate debt. It slashed the cost of credit all the way down to zero at the start of this decade, after the
Tokyo government finally gave up pouring concrete in the biggest "public works" program in history. Japan built
bridges to nowhere, freeways between small villages, and concreted river beds to make the water run better. More
than half the entire coastline was covered with concrete in the mid-90s; in 1996, Japan spent 30% more on
government-funded infrastructure than the US, Canada, Germany, France, Italy and the United Kingdom put together.
But "depression" is just short-hand for "no faith in the future" – and no matter how much Tokyo spends – and even
with short-term lending rates below 0.5% for the last ten years and more – Japan still refuses to borrow for fear of
what might happen next.
Cognitive therapy says that "life is terrible and death is worse" is the internal mantra of the truly depressed. "Only bad
things happened to me in the past and only bad things will happen to me in the future. I must never forgive anyone,
least of all myself." In Japan this guilt-trip obliges stony-faced executives and politicians to take their own lives rather
than embarrass Japan any longer. The entire economy, in short, remains horribly scared of the future.
Could raising the cost of credit help raise a smile? "There [is] the hypothesis that an increase in deposit rates, due to
an interest rate hike, will stimulate spending," notes Takehiro Sato for Morgan Stanley. Starting from the current 0.2%
paid on cash savings, you might want to agree. By raising rates, or so runs the theory, the Bank of Japan would help
boost household earnings – adding 0.3% to disposable income with a mere 0.5% hike – and help consumers to start
consuming again.
But Sato points out that rate-hikes would need to continue – year after year - to keep adding cash to Japan's
disposable income. And at the corporate level, meantime, Japan Inc. won't borrow at even 0.5% interest rates.
"Asset price deflation has largely run its course," Sato goes on – as though one of his balls is crystal – "[but] when
companies ought to be turning from reducing their debt ratios to increasing leverage – in turn raising return-on-equity
and market cap – in fact they are reluctant to take on new borrowing."
Raising rates after 12 years of deflation might imply a new confidence in what lies ahead – or so goes the theory. But
fear of the future is all that Japan seems to know. Modern psycho-therapy would in fact account the whole nation
depressed, even though – on a technical basis – Japan has now climbed out of depression.
Welcome to a post-bubble wasteland left over after risking too much – and losing it all. Tokyo's credit-fuelled mania
found its top nearly two decades ago. If you're expecting today's Anglo-Saxon bubble in debt to end quickly and pain-
free, just take a look at Japan.
Adrian Ash
BullionVault
Gold price chart, no delay | Gold prices live | Latest gold market news
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian
Ash is the editor of Gold News and head of research at BullionVault – where you can buy gold today vaulted in Zurich
on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2007
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money,
and any decision you make will put your money at risk. Information or data included here may have already been
overtaken by events – and must be verified elsewhere – should you choose to act on it.
by Adrian Ash
BullionVault
Monday, 25 June 2007
"...If depression is short-hand for fear of the future, then here's a glimpse of what lies beyond today's bubble in credit,
debt and financial confidence..."
YOU COULD KNOW less than even the British government about trading gold and foreign currencies for profit, but
you'd still have to reckon the money of this mystery country a "buy":
>> Its jobless rate just hit a 9-year low of 3.8%, and there's plenty more growth to come. The ratio of jobs to
jobseekers rose yet again last month.
>> It has one of the best-educated populations outside Singapore. Indeed, the Economist magazine calls it
"the world's most innovative nation"; per head of population, it holds more patents than anywhere else.
>> After a decade of recession, our mystery country has now enjoyed five years of unbroken growth – the
longest economic expansion since WWII. It also stands as the world's biggest creditor country, the exact
opposite of America's empire of debt. Its exports to Europe alone rose by nearly 18% in May from a year
earlier.
>> In the financial markets, its yield curve now points sharply higher, shouting to anyone who'll listen that
interest rates are set to rise. Two-year bonds are already paying more yield today than they have in a
decade.
What's not to want?
But the trouble remains that this country is called Japan – and shaking off its post-bubble depression is proving
harder than anyone could ever have guessed. After the almighty credit-fuelled top in Tokyo stocks and Japanese real
estate of 1989, the world's second-largest economy remains a basket case.
Far from enjoying huge capital inflows, as Bloomberg reports, "the Japanese Yen is down 6.6% versus the US Dollar
and more than 12% versus the Euro in the last 12 months." It's flirting with a two-decade low against Sterling.
Measured against gold, the Yen hasn't bought so little since April 1985. It's dropped by more than one-half in the last
two years alone.
Yet despite the Yen's incredible vanishing trick on the foreign exchange market, its purchasing power at home
continues to rise. Such a phenomenom may seem weird, even alien, to anyone living and investing outside Japan. It
up-ends the natural law that makes prices go up, little by little, with each day that passes. Here in West London, for
instance, the staff of BullionVault now find a shop selling chocolate bars for less than 45 pence (90¢), no matter how
small – not even a Kit-Kat! London's train stations, meantime, no longer sell any kind of liquid to thirsty commuters,
not even a bottle of water, for less than £1.19 ($2.38).
But in Japan prices keep falling instead of rising, and this aberration has been in effect for more than 12 years. In
spite of losing nearly a fifth of its Dollar value since the start of 2005, the Yen now buys more – not less – than it used
to.
Yes, prices had a long way to fall thanks to the Japan's bubble in credit of the late '80s – and Japan is still home to
two of the world's ten most expensive cities (Tokyo at No.4 and Osaka at No.8). But Japanese consumer prices
including energy costs are falling at an annual rate of 0.2%. And for the poor Japanese schleps trying to make a
living, this "deflation" in the cost of living still brings no blessings. Because wages are falling faster than prices.
Household disposable income in Japan dropped 0.4% in the year to April – even though the economy expanded by
2% annually. In fact, hourly wage-rates are now amongst the lowest in the developed world according to Tsuyoshi
Takagi, president of Japan’s biggest trade union, Rengo.
The reason? Post-bubble it's simple enough; more than four million full-time jobs were lost during the previous
government's tenure alone. More than 400,000 women joined the workforce last year, but many went part-time only.
Now Rengo is demanding a ¥50 increase in the minimum wage, taking it up to ¥650 per hour...less than $5.25 per
hour. And this in a country where you can pay $10 for a coffee – and a weak, tasteless coffee at that.
How to stimulate incomes and spending 18 years after the bubble went bang? The Bank of Japan has already done
all it can to stimulate debt. It slashed the cost of credit all the way down to zero at the start of this decade, after the
Tokyo government finally gave up pouring concrete in the biggest "public works" program in history. Japan built
bridges to nowhere, freeways between small villages, and concreted river beds to make the water run better. More
than half the entire coastline was covered with concrete in the mid-90s; in 1996, Japan spent 30% more on
government-funded infrastructure than the US, Canada, Germany, France, Italy and the United Kingdom put together.
But "depression" is just short-hand for "no faith in the future" – and no matter how much Tokyo spends – and even
with short-term lending rates below 0.5% for the last ten years and more – Japan still refuses to borrow for fear of
what might happen next.
Cognitive therapy says that "life is terrible and death is worse" is the internal mantra of the truly depressed. "Only bad
things happened to me in the past and only bad things will happen to me in the future. I must never forgive anyone,
least of all myself." In Japan this guilt-trip obliges stony-faced executives and politicians to take their own lives rather
than embarrass Japan any longer. The entire economy, in short, remains horribly scared of the future.
Could raising the cost of credit help raise a smile? "There [is] the hypothesis that an increase in deposit rates, due to
an interest rate hike, will stimulate spending," notes Takehiro Sato for Morgan Stanley. Starting from the current 0.2%
paid on cash savings, you might want to agree. By raising rates, or so runs the theory, the Bank of Japan would help
boost household earnings – adding 0.3% to disposable income with a mere 0.5% hike – and help consumers to start
consuming again.
But Sato points out that rate-hikes would need to continue – year after year - to keep adding cash to Japan's
disposable income. And at the corporate level, meantime, Japan Inc. won't borrow at even 0.5% interest rates.
"Asset price deflation has largely run its course," Sato goes on – as though one of his balls is crystal – "[but] when
companies ought to be turning from reducing their debt ratios to increasing leverage – in turn raising return-on-equity
and market cap – in fact they are reluctant to take on new borrowing."
Raising rates after 12 years of deflation might imply a new confidence in what lies ahead – or so goes the theory. But
fear of the future is all that Japan seems to know. Modern psycho-therapy would in fact account the whole nation
depressed, even though – on a technical basis – Japan has now climbed out of depression.
Welcome to a post-bubble wasteland left over after risking too much – and losing it all. Tokyo's credit-fuelled mania
found its top nearly two decades ago. If you're expecting today's Anglo-Saxon bubble in debt to end quickly and pain-
free, just take a look at Japan.
Adrian Ash
BullionVault
Gold price chart, no delay | Gold prices live | Latest gold market news
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian
Ash is the editor of Gold News and head of research at BullionVault – where you can buy gold today vaulted in Zurich
on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2007
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money,
and any decision you make will put your money at risk. Information or data included here may have already been
overtaken by events – and must be verified elsewhere – should you choose to act on it.
