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April 3, 2013 7:16 pm
Regime shifts in global monetary policy can throw up unexpected winners and losers. Think back to the 1970s when the UK was known as the sick man of Europe. The disease was inflation and the prognosis dire.
Once proud industries such as steel and shipbuilding were in terminal decline. Trade union militancy was at its peak, symbolised by the three-day week and the winter of discontent.
The stock market reflected these traumatic conditions, with the FTSE 30 index plummeting to 20-year lows. Company finances were in a wretched state. The idea that the UK stock market was offering a once-in-a-lifetime investment opportunity would have been ridiculed.
Yet that was exactly the case. From its nadir to the peak in 2000, the FTSE 30 rose more than 2,000 per cent – a performance that investors in today’s Brics can only dream of.
There are some uniquely British features in this tale but the big picture was global. Stagflation, labour strife and social fracture had become chronic. The UK simply suffered more deeply and for longer.
Real growth in the “resurgent” UK of the 1980s and 1990s was actually lower than in the 1960s. Supply-side reforms were absolutely necessary but it was the conquest of inflation that powered the UK’s transition from layabout to neoliberal poster child. Margaret Thatcher’s Britain also happened to be the most suited to the change in the priorities of global capitalism.
Now it seems we are in the early stages of another regime shift in monetary policy – from disinflation to aggressive reflation. Again, the nascent consensus is global, driven by the threat that unemployment and debt deflation pose to the system. Again a reversal of fortune is likely for the winners and losers in the previous regime.
If policy makers succeed in raising the rate of inflation into the long term, some high-growth emerging countries could suffer. Among the Brics, Brazil, India and Russia still have structurally high inflation. Among the developed countries, it remains to be seen whether the UK’s inflationary tendencies resurface after being subdued for so long.
As for potential winners, the most intriguing candidate is Japan. Like the UK in the 1970s, it is the outlier. It had already achieved low inflation by the early 1980s but the global disinflationary cycle continued for another two decades. Worse, the yen soared in value. These forces drove Japan into 15 years of falling prices. Today nominal gross domestic product is no higher than in 1992.
Now Prime Minister Shinzo Abe has delighted the markets with his “three arrows” strategy – monetary expansion, fiscal pump-priming and structural reform – which offers the prospect of a decisive break with deflationary stagnation. This week he said that his 2 per cent inflation target may be too ambitious – but his commitment remains.
What happens when a country emerges from deflation? Memories of the conquest of inflation are still fresh, but for examples of the reverse we must go back to the 1930s. Japan was one of the first to reflate successfully, thanks to Korekiyo Takahashi, finance minister from 1931 to 1936. His programme involved taking the country off the gold standard and issuing large amounts of bonds to be bought by the central bank. In today’s terms it combined fiscal stimulus, quantitative easing and currency depreciation.
The effect was dramatic. Under Takahashi, national income rose 60 per cent while consumer prices rose 18 per cent. The debt-to-GDP ratio stabilised while stocks doubled.
According to Ben Bernanke, chairman of the US Federal Reserve, Takahashi “brilliantly saved Japan from the world depression”. But there was no happy ending. At the age of 82 he was assassinated by officers enraged by his “exit strategy” of cutting military spending. Reflation should have been withdrawn but inflation soared under the aegis of irresponsible militarists.
The lesson of Takahashi-nomics is that reflation can take hold quickly if policy makers are determined. Mr Abe should therefore not let others’ lack of ambition thwart his own. Firing just one of Mr Abe’s arrows is unlikely to suffice, as the UK is currently proving. To secure recovery, all three should be fired simultaneously – in Japan and elsewhere. And a clear exit strategy needs to be settled in advance.
The writer is a Tokyo-based analyst at Arcus Research
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