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We must stop ignoring the economic lessons of Japan – they are the way forward

Felix Martin's "Real Money" column.

Japan is back. When the world’s financial markets were stopped in their relentless advance on 23 May, it was not the result of shock data from the US or yet another debacle in the eurozone, but because Japan’s stock market had suffered a 7 per cent fall after rising 50 per cent in the previous five months. Not for 20 years has the world’s third-largest economy demonstrated such vigour and such power over global sentiment. Where has this turnaround come from? What does it mean? And does it hold any lessons for the UK?

In 1993 the idea that Japan was about to disappear into two decades of economic irrelevance would have seemed preposterous. Sure, 1990 had been the year when the country’s mammoth stock-market bubble burst. But County Hall in London had just been snapped up by Japanese investors, and Michael Crichton’s latest bestseller, Rising Sun, summed up the widespread feeling that Japan was taking over the world.

It turned out that the hangover from the bubble years was far more damaging than expected. The 1990s and 2000s brought a string of stop-go policy responses. As a result, the Japanese economy barely grew, deflation set in, and Japan’s policymakers seemed to give up on trying to fix the problem.

All this changed in December 2012 with the election of the nationalist government of Shinzo Abe. Abe promised to take bold measures to reinvigorate the economy. He promised a strategy with three “arrows”: an aggressive loosening of monetary policy; a generous application of fiscal stimulus; and structural reforms to increase Japan’s productivity and competitiveness.

Dramatic reforms had been promised before – so the world, and the Japanese, waited to see whether the new doctrine of “Abenomics” would live up to its exciting prospectus. The immediate test came with the appointment of a new governor of the Bank of Japan in April this year.

Abe did not disappoint. In place of Masaaki Shirakawa – a graduate of that inner sanctum of anti-interventionism, the University of Chicago – arrived Haruhiko Kuroda, who learned his economics at Oxford from Sir John Hicks, the man who formalised the bible of activist policymaking, John Maynard Keynes’s General Theory.

On 4 April, Kuroda announced a programme of money-printing unprecedented even in this era of quantitative easing. The Bank of Japan will aim to double the money supply within two years by buying up the government’s debt with freshly issued yen.

This sudden conversion to policy activism came as a surprise after so many years of fatalism. Yet there is a historical precedent for the Japanese experiment. Abenomics is closely modelled on Japan’s economic programme of 1931-36, which succeeded in lifting the country out of the global depression of that era.

 Faced with persistent deflation, an overvalued currency and export markets in the doldrums following the US crash of 1929, Korekiyo Takahashi, the then finance minister, took Japan off the gold standard, ramped up government spending and ordered the central bank to finance it. The effect was the fastest recovery of any major economy. The fiscal stimulus kick-started demand. Low interest rates and the devalued yen fed privatesector investment and exports. Japan’s GDP grew more than 50 per cent in four years. No wonder Abenomics has adopted the Takahashi plan.

Japan was not the only major economy to depart from the interwar economic orthodoxy and execute a bold policy experiment. So did the UK. In September 1931, a decade of slump conditions forced Britain off the gold standard. In 1932, the new chancellor, Neville Chamberlain, announced that sterling would be devalued and the primary aim of monetary policy revised to return the price level to that of 1929 by any means necessary.

 There was one important difference from the Takahashi plan. In the British case, fiscal pump-priming was unnecessary. Low interest rates and an explicit commitment to higher inflation proved a powerful enough tonic for the private sector on their own. The key was an unprecedented boom in housebuilding which bequeathed to Britain’s suburbs the thousands of 1930s semis that line their streets today and made British GDP grow at 4.5 per cent a year between 1932 and 1936.

There was also a crucial common factor, however. Takahashi and Chamberlain were elected ministers of finance, not appointed central bank governors. Under their programmes, monetary policy ceased to be a matter for the bankers and became an explicit tool of government. This transfer of responsibility was critically important. For the same reason as an independent central bank can more credibly promise to hit a low inflation target, an elected politician is better able to commit to a high one. After all, it is in the government’s interests to inflate away the value of its debts. In both Japan and the UK, it was the public’s expectation that the government was finally serious about defeating the deflationary bust that prompted the recovery in private investment.

It is no surprise, therefore, that since the launch of Abe’s contemporary version of the Takahashi plan, monetary policy has been explicitly subordinated to the government’s plans for pubic spending and growth. In the new world of Abenomics, the Bank of Japan is independent in name alone.

The contrast with the UK could not be starker. Unlike the Japanese, we soldier on with a policy mix fit for a boom, not a slump: fiscal austerity combined with a low inflation target overseen by an independent central bank. Future generations will be astonished that we not only ignored the lessons we learned eight decades previously – but did so at the very moment when Japan was finally showing the way back to the future.

Felix Martin’s book “Money: the Unauthorised Biography” will be published by the Bodley Head on 6 June

Macroeconomist, bond trader and author of Money

This article first appeared in the 03 June 2013 issue of the New Statesman, The Power Christians

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide