Why Japan needs Abenomics and Bitcoin faces a lost century

What do Japan's "lost decade" and the intractable problem facing bitcoin have in common? Deflation.

The Japanese economy is in a mess. It has been for a while now. GDP broke $5trn in 1996, but then fell, and stayed low for a decade and a half. It only reached that high again in 2011, after well over a decade with growth fluctuating between mildly positive and mildly negative : the "lost decade" of economists' nightmares.

That's the background against which the new prime minister Shinzo Abe is struggling. Abe, a right-wing popular nationalist, was elected on a platform of giving the Bank of Japan a kick up the arse and using unconventional methods to restore the country to growth. His motivations have been questioned repeatedly: some fear that he's just trying to provide a short term boost to the economy before the upcoming election to in country's upper house; others, that he's only enacting bold new policy due to a stubborn belief that whatever conventional economists say must be wrong. Sure, a stopped-clock is right twice a day, but that doesn't mean you want to base your economy on what it says.

But the unconventional policies have been enacted, and now we are just waiting to see their effect. Abe has launched a ¥10.3trn stimulus package; his economic minister has explicitly targeted the stock market, in an attempt to push it up by 17 per cent in just two months; and he's got his choice of central bank governor, with the appointment of the maverick Haruhiko Kuroda.

But if we want to find out whether these plans are working, we don't look at GDP. That's too slow to change, it's too subject to external shocks, and, most importantly, it's a symptom, not a cause.

The real culprit is inflation. Or rather, deflation.

The Japanese economy has had inflation hovering around 0 per cent – and more frequently below it than above it – for almost as long as it has had stagnation. And while the country has seen a return, of sorts, to GDP growth, inflation remains as stubbornly negative as ever. Even after Abe's reforms, the headline rate fell – down to -0.9 per cent, the fastest rate of deflation in three years. That's against a background, not only of all those impressively major reforms, but also a far more direct one: raising the inflation target of the bank of Japan from 1 to 2 per cent.

But why is deflation a problem? In the west we're used to fearing inflation, after the scarring experiences of the 1970s, when prices grew by 20 per cent in a year. And we all learned in school about hyperinflation in Weimar Germany, where the price of bread would be higher in the afternoon than it had been in the morning, and how that led to the rise of Hitler. (Incidentally, that connection is largely mythical; although it was responsible for prompting the creation of many extremist groups, hyperinflation was largely beaten by 1924, long before the Nazi party became a force in German politics.)

But deflation – prices getting lower year-on-year – sounds like a good thing. Who doesn't like getting richer without having to do anything?

The easiest way to explain the issues is to look at another economy which could almost have been invented to illustrate the problems with deflation: the trade in bitcoins.

Bitcoin, you may recall, is an anonymous, cryptographic, peer-to-peer digital currency. It's been in the news because of its astonishing boom-and-bust dynamics, with the value of one bitcoin increasing by 2000% in two months, then losing almost all of that in a week, and now slowly returning to a second high. But what's interesting here is that it's a currency with deflation built in from the very start.

There will only ever be 21 million bitcoins. Half of them have been made – "mined", in the parlance – already, and the rest will be released in decreasing quantity at ten minute intervals until 2140. Add in the fact that, although they can't be created in any other way, they can be destroyed just by deleting the file that holds them, and you've got a currency which is designed to deflate.

That deflation was made far worse in the last couple of months by the hyperbolic increase in the value of a bitcoin measured in any normal currency. If you can buy a bitcoin for $10, and then a month later it costs you $200, then that is largely inseparable from inflation, particularly since you still need to use real currency to eat, pay your rent, and buy your travelcard to get to work. It got so bad that some started talking about "hyperdeflation".

What all that deflation does is ensure that, if you hold bitcoins, it makes sense to wait until you're absolutely sure you need to make a purchase before you part with them. After all, if you're the guy who bought a pizza for 10,000 bitcoins in 2010, you may have got a tasty meal; but if you had held off, you would be $1.3m richer now.

And it gets worse when you look at things like investment. If you used bitcoins to buy equity in a startup, your expected return would have to be through the roof to even stand still compared to where you would expect to be if you hoarded the money.

These are hypothetical questions for bitcoin – no stock market in the world lets you buy equity with the currency yet – but they're very real problems in Japan. The dearth of investment is so bad that the government has "nationalised" industrial stock, spending up to ¥1trn to buy plants in its biggest manufacturing industries.

There is optimism that Japan can pull itself out of this hole. Even as inflation continues to fall, predictions for future inflation are high; and there's a certain sense that with enough wild plans thrown at the wall, something is going to stick. Even if its just out of the frying pan and into the fire, a change of scenario would be nice.

The future's not so rosy for bitcoin. Even if its price stabilises, the long-term policy of deflation is not going to go away. The fact that Japan's "lost decade" lasted fifteen years may seem like a stretch, but bitcoin's could last a lifetime.

Shinzo Abe. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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What can we learn from Liam Fox's book? (Or, at least, from the first chapter)

How Liam Fox helps us face the new era, using orcs, Socrates and his knowledge of general medicine.

It’s a weird and wacky world, people, and we reach for political theory as a way of understanding the myriad linkages – ideological, emotional – between collectives of all sorts and individuals. Reach for political theory, and more importantly political history, for surely it can only be through an understanding of history that we can hope to reach into the shaken-up snow-globe and make sure the itty-bitty little snowman doesn’t get blown to buggery by the winds of change? For profundities such as the above I am indebted, latterly, to Dr Liam Fox, the erstwhile defence minister and currently Theresa May’s International Trade supremo – latterly because I’m primarily indebted to civil servants in his new bailiwick who have revealed to Private Eye that Dr Fox has insisted that they buy his 2013 globalisation excursus, Rising Tides: Facing the Challenges of a New Era, if they want to do just that.

The Eye snarked that Dr Fox’s book had sold just 1,876 copies thus far, but in fact that’s a perfectly respectable sale for a title by a contemporary politician. Ask the residents of Southmoor in Essex how they feel about instantly remaindered political books – half the village disappeared last year into a sinkhole that opened up when thousands of copies of On a Clear Day by David Blunkett, which had been buried in an adjacent landfill, reached a critical point of putrefaction. Some might describe this as ironic, others as justice. Anyway, inspired by Dr Fox’s self-conviction, and wanting to know what we can expect from the man who will be guiding our destiny as a trading nation through the savage cross-currents in the coming years, I hied me to the Amazon cloud reader to read the free sample.

Some might say this was the act of a hack who cares naught for the intellectual property of other writers, and is not prepared to put in the hard work required to understand the full compass of Dr Fox’s thinking, but my view is that the man himself will sympathise with my raw intellectual hunger. So pithily apodeictic (though simultaneously lyrical) is his own writing, that I came away from the free sample richer, wiser, and well equipped to advance his ideas to New Statesman readers – for which I believe both he, and you, will be grateful.

So, I mentioned history earlier, but let the man himself tell you how important it is to him, and us. “I am not one of those who believes that history repeats itself in the most literal sense,” Dr Fox writes, “but I do believe that the types of problems we face are repeated in time and realm.” True, it’s hard to think which “those” he might be thinking of, beyond the character of Phil Connors in Groundhog Day, but otherwise I think this is positively seer-like stuff.

Dr Fox’s use of the slightly archaic “realm” in the above may have given you pause for thought. Masterful prose writer that he is, he is softening his readers up for what comes next: a quotation from that great chronicler of humankind’s history, J R R Tolkien. And this, if I interpret it rightly, suggests that when trying to understand the motivation of jihadists, our best guide is the psychology of, um, orcs. But the history of Middle Earth alone cannot supply wisdom – neither for concerned citizens nor for the elves who lead them. For that, we require additional professional expertise, and Dr Fox is once again our man. Like the great Socrates, upon whose method he has undoubtedly based his own, Dr Fox teases out the technê of statecraft by analogy with his own illustrious medical career, in which: “The first task was to gather all the data possible about the patient and their complaint.”

Yes! How true this is. It makes me think of a hypothetical patient (or politician) whose complaint is that although he once held one of the high offices of state – one that requires of its incumbent great probity and discretion – he nonetheless attended many important meetings accompanied by an adviser who had no security clearance, and who had extensive links to lobbyists for defence contractors. Further, it makes me hypothesise that this patient (or politician), set up a “charity” to fund the activities of this “adviser”, which in turn had to shut down because of a mephitic odour, which – were I to have Dr Fox’s training – I’d probably diagnose as symptomatic of rot. It’s true that Dr Fox cautions his readers to “skip over any detail which seems excessive”, but then again: “I believe history brings some context to the subjects covered, something I think is often missed in contemporary debate.” Yes; and if it were the case that the same hypothetical patient had overclaimed the most expenses of any Tory frontbencher – including the rent on a flat used by the aforementioned special adviser – well, that would seem to provide some context for understanding how he’d function were he, once more, to hold a high office of state.

These, it seems, are the sorts of things being missed by contemporary debate. It’s as if the result of the EU referendum in June hit some sort of hard reset in the British political system: everything was turned off and turned on again, and in the process we have indeed forgotten our history, and so, like Phil Connors, we are doomed to repeat it. Thank the Lord for Dr Fox, whose civil servants will by now have absorbed their new boss’s forensic credo. When he was a general practitioner, having dealt with his own patients’ history and placed their symptoms in the right context: “The third task was to determine the course of treatment in the light of best accepted practice and the most up-to-date information available.”

Hear, hear! Given that the most up-to-date information available is that our hypothetical patient-cum-politician is still mired in the rising tide of his own bullshit, the most advisable course of treatment would appear to be euthanasia. After all, Dr Fox isn’t one of those who believes that history literally repeats itself – so a second resignation is out of the question. 

Will Self is an author and journalist. His books include Umbrella, Shark, The Book of Dave and The Butt. He writes the Madness of Crowds and Real Meals columns for the New Statesman.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump