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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In the 1980s, I went to a rally where Labour Party speakers shared the stage with men in balaclavas

The links between the Labour left and Irish republicanism are worth investigating.

A spat between Jeremy Corbyn’s henchfolk and Conor McGinn, the MP for St Helens North, caught my ear the other evening. McGinn was a guest on BBC Radio 4’s Westminster Hour, and he obligingly revisited the brouhaha for the listeners at home. Apparently, following an interview in May, in which McGinn called for Corbyn to “reach out beyond his comfort zone”, he was first threatened obliquely with the sack, then asked for a retraction (which he refused to give) and finally learned – from someone in the whips’ office – that his party leader was considering phoning up McGinn’s father to whip the errant whipper-in into line. On the programme, McGinn said: “The modus operandi that he [Corbyn] and the people around him were trying to do [sic], involving my family, was to isolate and ostracise me from them and from the community I am very proud to come from – which is an Irish nationalist community in south Armagh.”

Needless to say, the Labour leader’s office has continued to deny any such thing, but while we may nurture some suspicions about his behaviour, McGinn was also indulging in a little airbrushing when he described south Armagh as an “Irish ­nationalist community”. In the most recent elections, Newry and Armagh returned three Sinn Fein members to the Northern Ireland Assembly (as against one Social Democratic and Labour Party member) and one Sinn Fein MP to Westminster. When I last looked, Sinn Fein was still a republican, rather than a nationalist, party – something that McGinn should only be too well aware of, as the paternal hand that was putatively to have been lain on him belongs to Pat McGinn, the former Sinn Fein mayor of Newry and Armagh.

According to the Irish News, a “close friend” of the McGinns poured this cold water on the mini-conflagration: “Anybody who knows the McGinn family knows that Pat is very proud of Conor and that they remain very close.” The friend went on to opine: “He [Pat McGinn] found the whole notion of Corbyn phoning him totally ridiculous – as if Pat is going to criticise his son to save Jeremy Corbyn’s face. They would laugh about it were it not so sinister.”

“Sinister” does seem the mot juste. McGinn, Jr grew up in Bessbrook during the Troubles. I visited the village in the early 1990s on assignment. The skies were full of the chattering of British army Chinooks, and there were fake road signs in the hedgerows bearing pictograms of rifles and captioned: “Sniper at work”. South Armagh had been known for years as “bandit country”. There were army watchtowers standing sentinel in the dinky, green fields and checkpoints everywhere, manned by some of the thousands of the troops who had been deployed to fight what was, in effect, a low-level counter-insurgency war. Nationalist community, my foot.

What lies beneath the Corbyn-McGinn spat is the queered problematics of the ­relationship between the far left wing of the Labour Party and physical-force Irish republicanism. I also recall, during the hunger strikes of the early 1980s, going to a “Smash the H-Blocks” rally in Kilburn, north London, at which Labour Party speakers shared the stage with representatives from Sinn Fein, some of whom wore balaclavas and dark glasses to evade the telephoto lenses of the Met’s anti-terrorist squad.

The shape-shifting relationship between the “political wing” of the IRA and the men with sniper rifles in the south Armagh bocage was always of the essence of the conflict, allowing both sides a convenient fiction around which to posture publicly and privately negotiate. In choosing to appear on platforms with people who might or might not be terrorists, Labour leftists also sprinkled a little of their stardust on themselves: the “stardust” being the implication that they, too, under the right circumstances, might be capable of violence in pursuit of their political ends.

On the far right of British politics, Her Majesty’s Government and its apparatus are referred to derisively as “state”. There were various attempts in the 1970s and 1980s by far-right groupuscules to link up with the Ulster Freedom Fighters and other loyalist paramilitary organisations in their battle against “state”. All foundered on the obvious incompetence of the fascists. The situation on the far left was different. The socialist credentials of Sinn Fein/IRA were too threadbare for genuine expressions of solidarity, but there was a sort of tacit confidence-and-supply arrangement between these factions. The Labour far left provided the republicans with the confidence that, should an appropriately radical government be elected to Westminster, “state” would withdraw from Northern Ireland. What the republicans did for the mainland militants was to cloak them in their penumbra of darkness: without needing to call down on themselves the armed might of “state”, they could imply that they were willing to take it on, should the opportunity arise.

I don’t for a second believe that Corbyn was summoning up these ghosts of the insurrectionary dead when he either did or did not threaten to phone McGinn, Sr. But his supporters need to ask themselves what they’re getting into. Their leader, if he was to have remained true to the positions that he has espoused over many years, should have refused to sit as privy counsellor upon assuming his party office, and refused all the other mummery associated with the monarchical “state”. That he didn’t do so was surely a strategic decision. Such a position would make him utterly unelectable.

The snipers may not be at work in south Armagh just now – but there are rifles out there that could yet be dug up. I wouldn’t be surprised if some in Sinn Fein knew where they are, but one thing’s for certain: Corbyn hasn’t got a clue, bloody or otherwise. 

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 25 August 2016 issue of the New Statesman, Cameron: the legacy of a loser