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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Brexit has opened up big rifts among the remaining EU countries

Other non-Euro countries will miss Britain's lobbying - and Germany and France won't be too keen to make up for our lost budget contributions.

Untangling 40 years of Britain at the core of the EU has been compared to putting scrambled eggs back into their shells. On the UK side, political, legal, economic, and, not least, administrative difficulties are piling up, ranging from the Great Repeal Bill to how to process lorries at customs. But what is less appreciated is that Brexit has opened some big rifts in the EU.

This is most visible in relations between euro and non-euro countries. The UK is the EU’s second biggest economy, and after its exit the combined GDP of the non-euro member states falls from 38% of the eurozone GDP to barely 16%, or 11% of EU’s total. Unsurprisingly then, non-euro countries in Eastern Europe are worried that future integration might focus exclusively on the "euro core", leaving others in a loose periphery. This is at the core of recent discussions about a multi-speed Europe.

Previously, Britain has been central to the balance between ‘ins’ and ‘outs’, often leading opposition to centralising eurozone impulses. Most recently, this was demonstrated by David Cameron’s renegotiation, in which he secured provisional guarantees for non-euro countries. British concerns were also among the reasons why the design of the European Banking Union was calibrated with the interests of the ‘outs’ in mind. Finally, the UK insisted that the euro crisis must not detract from the development of the Single Market through initiatives such as the capital markets union. With Britain gone, this relationship becomes increasingly lop-sided.

Another context in which Brexit opens a can of worms is discussions over the EU budget. For 2015, the UK’s net contribution to the EU budget, after its rebate and EU investments, accounted for about 10% of the total. Filling in this gap will require either higher contributions by other major states or cutting the benefits of recipient states. In the former scenario, this means increasing German and French contributions by roughly 2.8 and 2 billion euros respectively. In the latter, it means lower payments to net beneficiaries of EU cohesion funds - a country like Bulgaria, for example, might take a hit of up to 0.8% of GDP.

Beyond the financial impact, Brexit poses awkward questions about the strategy for EU spending in the future. The Union’s budgets are planned over seven-year timeframes, with the next cycle due to begin in 2020. This means discussions about how to compensate for the hole left by Britain will coincide with the initial discussions on the future budget framework that will start in 2018. Once again, this is particularly worrying for those receiving EU funds, which are now likely to either be cut or made conditional on what are likely to be more political requirements.

Brexit also upends the delicate institutional balance within EU structures. A lot of the most important EU decisions are taken by qualified majority voting, even if in practice unanimity is sought most of the time. Since November 2014, this has meant the support of 55% of member states representing at least 65% of the population is required to pass decisions in the Council of the EU. Britain’s exit will destroy the blocking minority of a northern liberal German-led coalition of states, and increase the potential for blocking minorities of southern Mediterranean countries. There is also the question of what to do with the 73 British MEP mandates, which currently form almost 10% of all European Parliament seats.

Finally, there is the ‘small’ matter of foreign and defence policy. Perhaps here there are more grounds for continuity given the history of ‘outsourcing’ key decisions to NATO, whose membership remains unchanged. Furthermore, Theresa May appears to have realised that turning defence cooperation into a bargaining chip to attract Eastern European countries would backfire. Yet, with Britain gone, the EU is currently abuzz with discussions about greater military cooperation, particularly in procurement and research, suggesting that Brexit can also offer opportunities for the EU.

So, whether it is the balance between euro ‘ins’ and ‘outs’, multi-speed Europe, the EU budget, voting blocs or foreign policy, Brexit is forcing EU leaders into a load of discussions that many of them would rather avoid. This helps explain why there is clear regret among countries, particularly in Eastern Europe, at seeing such a key partner leave. It also explains why the EU has turned inwards to deal with the consequences of Brexit and why, although they need to be managed, the actual negotiations with London rank fairly low on the list of priorities in Brussels. British politicians, negotiators, and the general public would do well to take note of this.

Ivaylo Iaydjiev is a former adviser to the Bulgarian government. He is currently a DPhil student at the Blavatnik School of Government at the University of Oxford

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