By John Richardson
WHEN you have built your reputation on a policy that has so far failed, you have essentially two options. You can either admit you were wrong and reverse course or double down on your mistake – i.e. do more of the same failed thing in the hope that it will somehow eventually work.
The latter is clearly the approach of the Bank of Japan (BOJ) following its decision to push interest rates into negative territory.
Why have Abenomics failed, and why will they continue to fail? Because you cannot print babies. No amount of economic stimulus is going to change the chart above, which shows that:
- Japan’s BabyBoom began earlier than in the West, and averaged 2.2m babies/year in 1920 – 1952.
- Births then slowed in 1953 – 1983 to average only 1.7m/year.
- Births have since fallen further to average just 1.2m/year over the 30 years in 1984 – 2014.
- 2014 saw a record low level of only 1m births.
Japan’s household consumption accounts for almost two-thirds of its GDP. Japan not only has the oldest population in the world (median age is 45 years). Nearly half of its population are over 50 and so are already in their low-spending years.
The same problem of ageing populations afflicts the rest of the developed world. It is thus equally impossible for the stimulus policies of the European Central Bank (ECB) and the Fed to make any real difference to economic growth. They, too, cannot print babies.
But following the BOJ decision, why not more stimulus from the ECB and a delay to further Fed interest rates? Eventually, the Fed, in sheer desperation, might even opt for a fourth round of quantitative easing.
This would only make today’s debt crisis even worse. As William White, the veteran central banker, said during last month’s World Economic Forum in Davos:
Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief.
It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.
Mr White added that stimulus from quantitative easing and zero rates had leaked out across emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows.
Here is some very alarming data that backs up his comments: Emerging market debts in the decade to mid-2015 had risen from $5.4tn to $24.4tn, which left borrowing equivalent to 90% of the region’s GDP, according to Institute of International Finance data.
As a reminder of how has worked, investors needed good “stores of value”, whether they were hedge funds or the more staid pension funds. So when global interest rates and the US dollar were forced-down, post-Lehman Bros, investors were compelled to chase higher yields elsewhere in risky investments.
Hence, today’s failed gamble on emerging markets, which was largely built around the myth that China was becoming middle class by Western standards, virtually overnight.
Stimulus to date has already led to vast global overcapacity in gas, oil, petrochemicals, commodities in general and manufacturing. Investors were falling over themselves to lend companies. And petrochemicals and other companies were falling over themselves to borrow money because they seemed to believe the “China is becoming middle class” myth.
The last thing we therefore need is more of the same failed investments.
And note that the Japanese decision, which will of course drive down the value of the Yen, raises another worrying possibility: Other countries might be forced to follow suit, including most importantly of all China. As the pace of competitive devaluations increases, this would deepen today’s debt and deflation crisis.