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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Germany's political stability could be threatened by automation

The country's resistance to populism may be tested by changes to its manufacturing industry.

Germans head to the polls this Sunday 24 September. With Merkel set to win a fourth term as Chancellor, it has been dubbed a "sleepy" election – particularly compared to the Dutch and French campaigns a few months ago. Populism, while present, has not taken off to the same extent as in Germany’s neighbouring countries.

In a new Legatum Institute report co-authored with Matthew Elliott, we explore in detail why this is the case, evaluating the historical and economic circumstances as well as social, cultural and political attitudes. In short, support for both the populist Left Party (Die Linke/DL) and for the populist right Alternative for Germany (AfD) has so far been concentrated in former East Germany. At the national level, it has therefore been hard for either party to win more than around 10 per cent of the vote.

However, a longer term trend that might disrupt German politics in future election cycles is automation. With manufacturing making up a large proportion of the German economy, a significant amount of jobs are set to shift between occupational groups. According to the OECD, the portion of jobs at high risk of automation in Germany – 12 per cent – is one of the highest among countries measured.

While the elimination of some jobs and occupations does not necessarily mean net job losses – on the contrary, BCG estimates a net increase of 350,000 jobs by 2025 – it does mean upheaval, both in the job market and in the political sphere.

On the job market front, Germany has a shrinking pool of skilled labour. The Association of German Chambers of Commerce and Industry (DIHK) consider this poses the biggest risk to their businesses. The government is acutely aware of the issue – its August 2017 progress report projects 700,000 fewer skilled workers in 2030 than in 2014. Moreover, with an ageing population, the demographics are currently not in Germany’s favour.

Resolving this issue will require big and difficult political changes. On the one hand, it means that more immigration, particularly of young skilled workers, will likely be necessary. Given the backlash to Merkel’s "welcome" policy at the height of the refugee crisis, an anti-immigration sentiment was stirred which was dormant before.

On the other hand, while new jobs will be available, this does not necessarily mean that from one day to another that those working, for example, in manufacturing, will be keen to move into the service industry or another occupation altogether. Nor does it mean they will want to, or even perhaps be capable of, reskilling to carry out new digital roles.

In the UK and the US, we recently witnessed how these labour market changes were one of the big factors associated with support for the protectionist and anti-immigration rhetoric of the Leave campaign for Brexit and Donald Trump for president.

In Germany, the regions most exposed to the effects of automation are in the industrial south and west – parts of the country so far spared from the worst of populism. The potential for populist support to expand at the national level should therefore worry observers. To its credit, the current government has already been thinking about it, as evidenced in the Work 4.0 White Paper.

However, policy choices in the next few years will be crucial for mitigating the future labour market and political shockwaves of automation. If politicians choose to merkeln (do nothing) on the issue, the populist backlash might hit Germany, too.

Claudia Chwalisz is a consultant at Populus and a fellow at the Crick Centre, University of Sheffield. She is the author of The People’s Verdict: Adding Informed Citizen Voices to Public Decision-making (2017) and The Populist Signal: Why Politics and Democracy Need to Change (2015). Her guide to the German election authored with Matthew Elliott can be downloaded here