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-Being in the UK and Japan
The Global Economy: perspectives from the UK and Japan
27 October 2008 RSA, 8 John Adam Street, London WC2N 6EZ
In welcoming the audience to ‘The Global Economy, Perspectives from the UK and Japan’, Professor Conte-Helm (Director General, the Daiwa Anglo-Japanese Foundation) reviewed the topics which had been discussed throughout the year-long seminar series Economic Futures: Wealth and Well-Being in the UK and Japan, including wealth creation, the role of Tokyo and London as economic engines, banking crises and consumer confidence, challenges for industry in Japan and the UK, and the wealth gap. Louis Turner (Chief Executive of the Asia-Pacific Technology Network and Associate Fellow of Chatham House), the seminar chair, commented on the apt timing of the final seminar as he introduced the evening’s three speakers. Martin Wolf CBE (Associate Editor and Chief Economics Commentator, Financial Times) began by saying that the current economic events are by far and away the most significant of his lifetime. Remarking that we are living in exciting times, he then set out to cover what is happening, assess why this has happened, anticipate what is going to happen next, propose what needs to be done, and speculate on the lessons to be learned. In assessing what is happening, Wolf remarked that the present financial crisis demonstrates that the United States is and has been at the core of the financial system since the end of the First World War and that a US meltdown is a world meltdown. He then explained that, among other causes, the collapse of asset worth, the violent implosion of the shadow banking system, the drying up of credit to the economy, and the downward pressure on consumption are threatening the first global depression since the 1930s as these factors have led to a freezing of the financial system and the money markets. A number of forces have come together to culminate in this crisis: a glut of excess savings rather than excess demand for money which fed the housing bubble; low inflation; low real interest rates; deregulation and extremely bad regulation; extreme financial innovation in the form of securitisation; the aftermath of the bursting of the American bubble; and the impact of China. According to Wolf, the current situation is a classic and extreme case of the Minsky cycle (as identified by Dr Hyman Minsky) comprising confidence, euphoria and revulsion. We are now in the revulsion phase, having moved from buying anything to buying nothing. The crisis has been severe as a result of the accumulation of high levels of household debt, particularly in the US and UK, over the past 10 to 11 years; the massive size of the asset bubbles; the inadequate capitalisation of the banking and shadow banking systems; and the extraordinary dispersion of risk (originally intended to stabilise the system) which has resulted in radical uncertainty as no-one knows where the bad debt is located. Authorities in the western world and the US Treasury have also made mistakes, notably in their decision over Lehman Brothers and in allowing panic to spread. As to what will happen, Wolf said that although he is hopeful that the action taken by the G7 governments has saved the core banking institutions, the shadow banking system has not been saved and no significant housing market has yet hit rock-bottom. He signalled that we will have to cope with ongoing asset price collapses in housing and equities, and a deep and prolonged recession in the US and most of Western Europe, as we are not likely to see the spending which is necessary to rebalance the world economy. Encouraging offsets are, however, the lower oil price and the lower interest rates. Wolf predicted that interest rates will drop to 0% in the USA and possibly all across the West within the next year, following the Japanese experiment. Though he does not think the West will suffer an entirely lost decade, this is not, however, totally inconceivable. In reflecting on what needs to be done, Wolf asserted that Keynes’ hour had come round again and suggested that interest rates need to be reduced sharply, emerging economies financed generously, and government spending increased; and if banks are given government money then they have to be forced to lend. He also made a plea for massive increased spending in the surplus countries, particularly China, to offset what will be a massive reduction in spending by the historical deficit countries. Wolf concluded by saying that it is far too early to know what the lessons for the future are as we do not know how bad the crisis will be or how it will end; nevertheless, he advocated some recommendations, including the need for a bigger collective insurance system and better capitalised banks that stick to core
activities, as well as an oversight and resolution regime for non-banks, and better management of liquidity. The second presentation by Tomohiko Taniguchi (Adjunct Professor at Keio University, Senior Advisor to Central Japan Railway and Advisor to the Japanese Ministry of Foreign Affairs), looked at Japan’s political paralysis, its lost decade and the idea of a ‘reverse’ Marshall Plan. Prior to concentrating on Japan, Taniguchi turned his attention to the UK. Referring to Robby Feldman of Morgan Stanley, who described events in Japan in the 1990s as ‘CRIC’ or crisis, response, improvement and complacency, Taniguchi asserted that though Gordon Brown’s policy package has been bold, it is far from complete and Brown cannot afford to be content let alone complacent as we do not yet know how this crisis will continue to unfold. Turning to Japan’s political paralysis, Taniguchi remarked on the ease with which the opposition can block Liberal Democratic Party (LDP) bills from passing the Upper House (the Lower House only has primacy when it comes to deciding the budget). The LDP is hamstrung, as in order to overturn the Upper House a two-thirds majority is necessary and as the LDP constitutes less than 64% of the Lower House, it has had to ally itself with the Komeito Party. The public is also tired of Prime Ministers coming and going at short notice without any general elections, which make it difficult for Prime Minister Aso to act decisively. The current economic crisis surfaced out of the blue, said Taniguchi, and Aso, catching up with its enormity faster and more deeply than anyone else in his or the opposition party has reacted to the emergency by appropriating a solemn and presidential style. It would appear, according to Taniguchi, that calamity has worked in Aso’s favour, yet he is in no mood to have an early election, resisting the Democratic Party’s clamouring for one. Taniguchi said that during Japan’s ‘lost decade’ most major Japanese banks ended up partially nationalized. This was at a time where elsewhere credit derivatives began to proliferate and shadow banking began to overshadow real banking. As Japan at the time was weathering its economic crisis it did not get involved in these shadowy practices which has meant that its banks have emerged relatively unscathed this time round. Taniguchi remarked on how surreal it had been to see Nomura and Mitsubishi buying into Lehman and Morgan Stanley, and how the tail-ender is now top dog and has regained its animal spirit. In outlining the imperative that Japan must support the status quo, Taniguchi insisted that Japan must do its utmost to help preserve the hegemonic stability of the US, which has been the sole provider of security in the Asia-Pacific region in which the Japan-US alliance is the real linchpin. Barring the US, Japan has virtual security pacts with India and Australia in order to keep maritime safety, but Taniguchi affirmed that the US must remain the provider of the hegemonic stability on which all in the region have grown and prospered. Taniguchi claimed that Japan cannot afford a US in retreat and suggested that in order to preserve the US-centred global economy, the UK, the US and Japan could form a de facto maritime power in order to keep the US-centred world stable. He went on to suggest a ‘reverse’ Marshall Plan by which Japan buys into the US banking sector by means of bonds, until the US resurges as the world’s key player. Taniguchi concluded by recounting a new interpretation of the lost decade by the economists Fumio Hayashi and Edward C Prescott who stated that the lost decade could not be accounted for by hypotheses such as the breakdown of the financial system through inadequate fiscal policy and the liquidity trap. Rather, it was caused by the fall in the growth rate and total factor productivity as a result of the working week dropping from 44 to 40 hours between 1988 and 1993 (driven among other things by humiliating foreign remarks that the Japanese should work less and spend more). In order to escape this present predicament, Taniguchi finished his talk by advocating a return to working hard and for longer hours.
The third speaker, Joe Studwell (freelance writer and broadcaster and editor-in-chief of the China Economic Quarterly) began by acknowledging Minsky’s acumen before going on to give an overview of the global situation and then to comment on China, Korea and South East Asia more specifically. Reflecting on Alan Greenspan’s apparent surprise at the outbreak of the current crisis, Studwell stated that financial crises have been part and parcel of the Anglo-Saxon world since the breakdown of the Bretton Woods system. The first postwar financial crisis to hit the US which involved lender of the last resort intervention by the Federal Reserve was in 1966, towards the end of Bretton Woods, when tensions first began appearing. There followed crises in 1969-70, 1974-75, 1981-82 and 1987-88, which also involved lender of the last resort intervention while the crises of 1997-1998 and the IT crash of 2001 did not. Studwell went on to say that though it might be nice to do without banks, quoting Merton Miller, a Nobel laureate, who referred to them as ‘disaster-prone 19th century technology’, they in fact cannot be dispensed with as they are the only element of the financial system which can provide working capital to industry. Studwell suggested that a reorganization of the banking system may be a sensible way to proceed, whereby the utility function of bank, i.e., providing capital to industry, is kept separate from the bank’s other functions. In talking about China, Studwell said that it would not be particularly hit or experience meltdown, despite statistics showing that its growth rate has dropped rather sharply from 11% to 9%. According to Studwell, China has been alerted to the dangers of extreme deregulation by previous external banking crises such as the 1997-98 one in Asia. While China had been looking into banking sector deregulation in recent years, Studwell asserted that the present crisis will, fortuitously, serve to temper anyone with more ambitious ideas from moving too quickly toward deregulation. At the same time and in its favour, China is running a budget surplus and its consumer indebtedness is very low at 18% of the GDP, comprising mainly mortgages. China, according to Studwell, has considerable room for manoeuvre to deal with the present situation and the Chinese government has already taken action before its main Economic Leading Group meeting in early December. It has lowered interest rates, reduced the requisite deposit when buying a flat from 30% to 20% and lowered the tax on small apartments. The Chinese government will want the growth rate to remain at about 8% and Studwell said that he expected the government to take aggressive measures in order to retain the growth rate at 8% at the end of year meeting. Studwell also pointed out that China will be able to spend on ‘useful’ infrastructure projects and predicted an exponential expansion in railway, underground and light railway projects. Despite this positive outlook on China, Studwell warned that one should not overestimate China’s ability to help the rest of the world. Studwell took issue with Wolf’s belief that net savers are responsible for the global crisis, asserting that the problems were embedded in the architecture of the financial system and that China should not be blamed for what he termed ‘precautionary’ savings which are for domestic use, to cover educational and medical expenses as a result of the lack of a Chinese welfare system, and for saving in order to invest in its own infrastructure. Studwell finished by criticizing the huge IMF intervention in South Korea during the 1997-98 crisis, attributing the IMF with having imposed on it an Anglo-Saxon financial system which is now imploding, having resulted in deregulation and a housing and stock market bubble. Following IMF intervention, suggested Studwell, South Korean bankers went from banking industrial development to banking mortgages and debts. He also went on to say that South East Asia has not recovered from the Asian financial crisis of 1997-98 as a result of economic liberalization policies even though these countries had been considered the so-called ‘tiger economies’ in the early 1990s. The wide-ranging discussion following the presentations conveyed the audience’s interest in the topics raised and included questions about Japan as current Chair of the G8 and whether it would show
leadership or imagination in bailing out the US or whether it would fall under China’s shadow; the UK’s willingness to join the Euro-bloc as a result of the current crisis or whether economic nationalism will drive some countries away from the Euro-zone; the desirability or not to return to the era of regulation before market and borderless economies; the results of IMF intervention in Korea, China’s level of household savings and the lessons that can be learnt from Japan. Louis Turner closed proceedings by remarking that it had been a mesmerising evening thanks to the stimulating and deeply informed presentations, and a good interchange between contributors and the audience.
Martin Wolf CBE is Associate Editor and Chief Economics Commentator at the Financial Times. He began his career at the World Bank before moving to the Trade Policy Research Centre and then the Financial Times in 1987. He has been a Forum Fellow at the annual meeting of the World Economic Forum in Davos since 1999. He has won numerous prizes for his financial journalism, including the Wincott Foundation Senior Prize (1989 and 1997), the Accenture Decade of Excellence Award (2003), and the Business Journalist Commentator of the Year Award (2008). His most recent publication is Why Globalization Works (Yale University Press). Tomohiko Taniguchi is Adjunct Professor (International Political Economy) at Keio University, Senior Advisor to Central Japan Railway, and Advisor to the Japanese Ministry of Foreign Affairs (MOFA). Previously, he was Deputy Press Secretary and Deputy Director-General for Public Diplomacy at MOFA. He started his career with Nikkei Business and worked in London as the magazine’s first European Bureau Chief (1997-2000). He has been a visiting fellow at Princeton University, Shanghai Institute of International Studies, and the Brookings Institution. He is an author of several books on topics such as international currency regime. Joe Studwell is a freelance writer and broadcaster, and editor-in-chief of the China Economic Quarterly. His contributions have featured in The Economist, the Financial Times, the Asian Wall Street Journal, and the Far Eastern Economic Review. During the 1990s, he was based in Hong Kong and Beijing where he wrote a series of studies on China for the Economist Intelligence Unit. His books include The China Dream: the Quest for the Greatest Untapped Market on Earth (Profile Business) and Asian Godfathers: Money and Power in Hong Kong and South-East Asia (Atlantic Monthly Press) He is also a director of the Asian advisory firm, Dragonomics. Louis Turner (chair) is Chief Executive, Asia-Pacific Technology Network and an Associate Fellow of Chatham House. His books include Industrial Collaboration with Japan (Routledge) and The British Research of Japanese Companies (with David Ray and Tony Hayward; Anglo-Japanese Economic Institute). He is currently researching the history of Japanese investment in the UK since 1990, having previously worked on Anglo-American influences on the Japanese Business System.
The Daiwa Anglo-Japanese Foundation
The Daiwa Anglo-Japanese Foundation is a UK charity, established in 1988 with a generous benefaction from Daiwa Securities Co Ltd. The Foundation’s purpose is to support closer links between Britain and Japan. It does this by: • • • • making grants available to individuals, institutions and organisations to promote links between the UK and Japan across all fields of activity enabling British and Japanese students and academics to further their education through exchanges and other bilateral initiatives awarding Daiwa Scholarships for British graduates to study and undertake work placements in Japan organising a year-round programme of events to increase understanding of Japan in the UK.
Daiwa Foundation Japan House, the London-based headquarters, acts as a centre for UK-Japan relations in Britain by offering a wide programme of seminars, exhibitions and book launches as well as meeting rooms for Japan-related activities and facilities for visiting academics. The Foundation is represented in Japan by its Tokyo Office, which provides local assistance to Daiwa Scholars and administers grant applications from Japan. It also handles general enquiries, and forms part of the network of organisations supporting links between the UK and Japan.
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