Andrew Miller: We suspect Japan will become more like the West

As Western inflation has slowed again, so the comparisons with Japan's lost decade(s) have been dusted off

Andrew Miller
Andrew Miller

As Western inflation has slowed again, so the comparisons with Japan’s lost decade(s) have been dusted off.

Since the bursting of its huge stock market and property bubble at the end of the 1980s, Japan’s economy has defied many and varied attempts to jumpstart it.

Total output has grown by less than 1% per annum in the last twenty years, alongside falling prices.

Would falling prices in the West mean we’d face equally sluggish growth, and flatlining nominal GDP? Not necessarily.

Falling prices have coincided with slow growth in Japan, but as we noted last week that doesn’t mean they caused it. The stagnation may be misdiagnosed: the post-2008 obsession with monetary and fiscal policy, and banking systems, may have obscured the role played by microeconomic factors (and the scale of the bubble that burst there to begin with).

Japan has not been conventionally capitalist.

Its population is shrinking, and its labour market is one of the least flexible. Regular readers will know that we are hugely sceptical of the “demographic timebomb”, but only one big economy has less room for manoeuvre than Japan in this respect – China.

Bottom-up reform and liberalisation is the one strategy that has not been seriously tried in Japan, partly because the political system has been just as sclerotic as the economy (there have been half a dozen different prime ministers since Lehman Brothers collapsed, and more than a dozen since the bubble burst).

Now it is the third of the “three arrows” in prime minister Shinzo Abe’s policy quiver: it has underwhelmed to date, and the jury will be out on its success for some time.

We’ve been sitting firmly on the fence as far as Japan’s stock market is concerned: we generally advise owning Japanese stocks, but only in proportion to their weight in developed markets. There are many world-class manufacturers in Japan that are active globally – think cars, consumer electronics, capital goods – but even at last year’s lows the overall market didn’t strike us as particularly cheap, even before taking into account companies’ low profitability.

We also felt the yen would likely weaken: we could have advised hedging the currency, but history is littered with reports recommending a long Nikkei/short yen trade that have coincided perfectly with a market top and yen rally. This was a compound risk we didn’t feel we needed to recommend, and it’s not as if the US or continental European markets – our favourites – have done badly.

In conclusion, rather than expect the West to become more like Japan, we suspect Japan will become more like the West. In the meantime, remember that if Japan continues to stagnate it is doing so at a level of prosperity, social stability and sophistication that many would envy. Please bear in mind that all investments can fall in value.

:: Andrew Miller is a director of Barclays Wealth and Investment Management in Newcastle


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