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.

Photo: Getty
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The UK press’s timid reaction to Brexit is in marked contrast to the satire unleashed on Trump

For the BBC, it seems, to question leaving the EU is to be unpatriotic.

Faced with arguably their biggest political-cum-constitutional ­crisis in half a century, the press on either side of the pond has reacted very differently. Confronting a president who, unlike many predecessors, does not merely covertly dislike the press but rages against its supposed mendacity as a purveyor of “fake news”, the fourth estate in the US has had a pretty successful first 150-odd days of the Trump era. The Washington Post has recovered its Watergate mojo – the bloodhound tenacity that brought down Richard Nixon. The Post’s investigations into links between the Kremlin and Donald Trump’s associates and appointees have yielded the scalp of the former security adviser Michael Flynn and led to Attorney General Jeff Sessions recusing himself from all inquiries into Trump-Russia contacts. Few imagine the story will end there.

Meanwhile, the New York Times has cast off its image as “the grey lady” and come out in sharper colours. Commenting on the James Comey memo in an editorial, the Times raised the possibility that Trump was trying to “obstruct justice”, and called on Washington lawmakers to “uphold the constitution”. Trump’s denunciations of the Times as “failing” have acted as commercial “rocket fuel” for the paper, according to its CEO, Mark Thompson: it gained an “astonishing” 308,000 net digital news subscriptions in the first quarter of 2017.

US-based broadcast organisations such as CNN and ABC, once considered slick or bland, have reacted to Trump’s bullying in forthright style. Political satire is thriving, led by Saturday Night Live, with its devastating impersonations of the president by Alec Baldwin and of his press secretary Sean Spicer by the brilliant Melissa McCarthy.

British press reaction to Brexit – an epic constitutional, political and economic mess-up that probably includes a mind-bogglingly destructive self-ejection from a single market and customs union that took decades to construct, a move pushed through by a far-right faction of the Tory party – has been much more muted. The situation is complicated by the cheerleading for Brexit by most of the British tabloids and the Daily Telegraph. There are stirrings of resistance, but even after an election in which Theresa May spectacularly failed to secure a mandate for her hard Brexit, there is a sense, though the criticism of her has been intense, of the media pussy-footing around a government in disarray – not properly interrogating those who still seem to promise that, in relation to Europe, we can have our cake and eat it.

This is especially the case with the BBC, a state broadcaster that proudly proclaims its independence from the government of the day, protected by the famous “arm’s-length” principle. In the case of Brexit, the BBC invoked its concept of “balance” to give equal airtime and weight to Leavers and Remainers. Fair enough, you might say, but according to the economist Simon Wren-Lewis, it ignored a “near-unanimous view among economists that Brexit would hurt the UK economy in the longer term”.

A similar view of “balance” in the past led the BBC to equate views of ­non-scientific climate contrarians, often linked to the fossil-fuel lobby, with those of leading climate scientists. Many BBC Remainer insiders still feel incensed by what they regard as BBC betrayal over Brexit. Although the referendum of 23 June 2016 said nothing about leaving the single market or the customs union, the Today presenter Justin Webb, in a recent interview with Stuart Rose, put it like this: “Staying in the single market, staying in the customs union – [Leave voters would say] you might as well not be leaving. That fundamental position is a matter of democracy.” For the BBC, it seems, to question Brexit is somehow to be unpatriotic.

You might think that an independent, pro-democratic press would question the attempted use of the arcane and archaic “royal prerogative” to enable the ­bypassing of parliament when it came to triggering Article 50, signalling the UK’s departure from the EU. But when the campaigner Gina Miller’s challenge to the government was upheld by the high court, the three ruling judges were attacked on the front page of the Daily Mail as “enemies of the people”. Thomas Jefferson wrote that he would rather have “newspapers without a government” than “a government without newspapers”. It’s a fair guess he wasn’t thinking of newspapers that would brand the judiciary as “enemies of the people”.

It does seem significant that the United States has a written constitution, encapsulating the separation and balance of powers, and explicitly designed by the Founding Fathers to protect the young republic against tyranny. When James Madison drafted the First Amendment he was clear that freedom of the press should be guaranteed to a much higher degree in the republic than it had been in the colonising power, where for centuries, after all, British monarchs and prime ministers have had no qualms about censoring an unruly media.

By contrast, the United Kingdom remains a hybrid of monarchy and democracy, with no explicit protection of press freedom other than the one provided by the common law. The national impulse to bend the knee before the sovereign, to obey and not question authority, remains strangely powerful in Britain, the land of Henry VIII as well as of George Orwell. That the United Kingdom has slipped 11 places in the World Press Freedom Index in the past four years, down to 40th, has rightly occasioned outrage. Yet, even more awkwardly, the United States is three places lower still, at 43rd. Freedom of the press may not be doing quite as well as we imagine in either country.

Harry Eyres is the author of Horace and Me: Life Lessons from an Ancient Poet (2013)

This article first appeared in the 20 July 2017 issue of the New Statesman, The new world disorder