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 progressives can learn from Europe

The centre-left must articulate its own vision of a cohesive society, backed by an understanding of sovereignty that accepts the nation-state is the central pillar of security and belonging.

The debate about the Labour party’s future has seldom been more parochial or inward-looking. Those who pass comment on Labour’s fate from the right and left of the party do so with an almost entirely British lens. In this insular universe, it is as if the world beyond the UK’s shores never existed. ‘Socialism in one country’ is back with a vengeance. Yet to recover politically and electorally, British Labour must learn from social democrats and progressive forces across Europe. There are three critical lessons from other countries that the centre-left ought to heed.  

The first is that centre-left parties have to resist being squeezed between neo-liberalism and the new social movements. Yes, social democrats should rebuild their economic credibility and espouse a responsible governing agenda. But that should not mean rejecting all ties to social and environmental activism. The networked civil society is where most political energy and vitality currently resides in western democracies. The lesson of Podemos in Spain and Greece’s Syriza is that people want to be agents of change themselves, whether saving local high streets from unscrupulous developers or working to build their own affordable housing. Casting a ballot every four or five years no longer constitutes meaningful political engagement. Across Europe, social democrats have to form new alliances in pursuit of a better society reaching beyond traditional party structures. 

A further object lesson is that opposition to austerity on its own is not enough to win power. Of course, premature cuts have weakened growth, jobs and living standards. In southern Europe, the masochistic pursuit of austerity threatens to unleash a social catastrophe. However, centre-left parties must show they would be competent managers of the economy articulating a coherent plan to deal with debt: not just net public sector debt over the economic cycle, but tackling unsustainable financial sector and household debt. Social democrats have to show how they would govern in a world where there is less money around for state spending after the great recession and the impending threat of secular stagnation. This demands a strategy for regulating financial markets that promotes the public good, tackles systemic risks and reforms banks that are ‘too big to fail’. An industrial modernisation plan would rebalance our economies away from their reliance on financial services towards knowledge-intensive sectors and manufacturing. In reforming the tax system, there ought to be a major clamp-down on cross-border tax evasion and fraud while restoring the progressivity of tax using redistribution to tackle new inequalities.

Finally, the left must not be distracted from confronting deeper underlying forces in politics. Centre-left parties are losing elections because voters don’t trust politicians to protect their way of life against the impersonal forces of global change. Europe has pitched dramatically to the right - not only towards Christian Democratic and Conservative parties, but new forces adept at exploiting voters’ fears about economic insecurity, immigration and hostility to the EU. In the UK, UKIP has now become the dominant challenger to Labour in northern England and the Midlands; last year, the Danish People’s party surged to power. In the heartlands of European social democracy, from the Nordic states to France and the Netherlands, right-wing populists are on the rise. In Austria this week, a hard right presidential candidate was in touching-distance of power.

The failure to counter the right isn’t just about poorly executed electoral strategies, weak leadership, or the price of incumbency in coalition governments: something more profound is going on. Regardless of national context, social democracy’s support base is being eaten away. The left is losing, not just on the conventional politics of economic competence, but increasingly on the vexed politics of national identity.

That said, the temptation to raise the drawbridge against immigration ought to be resisted. Flirting with a restrictive immigration policy is superficially tempting when the populist right is winning, but imposing arbitrary limits would be economically damaging as well as politically unprincipled. Instead, low wage and vulnerable workers across the EU ought to be better protected. Permitting the uncontrolled exploitation of low-cost labour in Eastern Europe has undermined the entire European project. More safeguards against agency working and zero-hours contracts are needed.             

Rather than pretending that government on its own can do everything to shield citizens and communities from global market forces, the priority should also be to encourage intermediate institutions located between the central state and the free market that rebuild a sense of local attachment, recreate respect for traditional jobs and civic identities, and encourage a spirit of mutual obligation embodied in organisations like mutual’s and co-op’s. The left must end its ambivalence about English identity in the aftermath of devolution to Scotland, Wales and Northern Ireland. Labour must not be afraid ‘to speak for England’.

The centre-left must articulate its own vision of a cohesive society, backed by an understanding of sovereignty that accepts the nation-state is the central pillar of security and belonging. To navigate the hard road back to power, social democratic parties will have to acknowledge the communal attachments that give meaning to our lives in an era of unprecedented insecurity and upheaval. Only by securing the trust and allegiance of citizens within the nation-state can the centre-left win the argument for international engagement and co-operation: the cornerstone of a liberal world order. 

Patrick Diamond is Co-Chair of Policy Network. The Progressive Governance Conference takes place in Stockholm 26-7 May 2016