As Japan's example shows, quantitative easing keeps companies going in a crisis, but can prevent them from adapting to reality in the long run
Anyone who, like me, grew up in the 1980s, will remember Japanese technology as being at the height of hi-tech fashion. Panasonic, Sony and Sharp all symbolised the cutting edge of innovation and style, perhaps most thrillingly when Sony introduced the Walkman – imagine, a stereo you could listen to on the move!
Despite the catastrophic Japanese economic collapse in the late 1980s that led to the so-called Lost Decade (which has lasted far longer than 10 years), many of these firms managed to hold on to their position as export powerhouses. And while their country dipped in and out of recession, Japanese carmakers once written off as purveyors of cheap-but-clunky boneshakers (not least when Alan Partridge called the Lexus a "Japanese Volvo"), have moved up the value chain to turn out sleek, desirable vehicles.
But it's many years since Japan's corporate giants were setting the pace. From Silicon Valley, where Apple designs one whizzy must-have after another, to South Korea, where nimble Samsung is throwing billions of dollars at innovation, Japan's firms have been outflanked. China is cheaper – and itself following the same path, from undercutting rivals on cost, to designing its own technology – while Korea, Taiwan and the US continue to innovate.
Japan's giants are struggling to maintain their dominance. Sharp was forced to warn recently that it has "serious doubts" about its ability to continue as a going concern. President Takashi Okuda said: "We have a lot of great technology which we want to tap to revive and generate profit, but the company does not have that vitality." Panasonic and Sony have issued grim profit warnings. Official figures to be published tomorrow are likely to show that the Japanese economy as a whole slid into the red in the third quarter of 2012, once the momentum of post-tsunami reconstruction began to subside; and many analysts are expecting a second negative quarter at the end of the year, which would mark (yet another) recession.
The Organisation for Economic Co-operation and Development predicted last week that a declining working-age population and the rise of powers such as China and India mean Japan will contribute just 2% of global GDP in 2060; in 2011, it was 7% .
There are plenty of reasons for the woes of the Japanese industrial sector, not least that independent directors are few and far between, and cross-shareholdings – one company owning a chunky stake in another – remain common. Briton Michael Woodford discovered the perils of trying to impose western corporate values on a Japanese firm when he exposed a financial scandal at camera-maker Olympus,![ext]()
which he had been brought in to run, but was duly dumped and later excoriated by its chairman for showing "dislike of Japan".
But as John Plender pointed out in the Financial Times last week![ext]()
, there's another explanation for the country's flagging performance: its economy has been wrenched out of shape by many years of rock-bottom borrowing costs.
Quantitative easing, the drastic policy of pumping electronically-created money into the economy, was part of the Bank of Japan's armoury long before it was unleashed in the UK in the teeth of the credit crisis.
Driving down the cost of borrowing to bolster demand and staunch the flow of bankruptcies and job losses is the textbook response of a central bank facing an economy in crisis. Once growth returns, the argument goes, debt levels can be brought down and necessary restructuring take place at a less painful pace.
But over time, as cut-price loans become the norm, the corporate sector can become crystallised in its existing shape, too insulated from the cold winds of competition and progress that might have swept many firms away, or forced them to adapt to a different world, in a process the economist Joseph Schumpeter![ext]()
described as "creative destruction". By delaying the reckoning, and keeping "zombie companies" alive, there is a risk that when it eventually comes, the correction is even more dramatic.
Bank of England governor Sir Mervyn King is well aware of this dilemma: keeping the economy afloat in the short term (or in the UK's case, preventing a deep recession becoming an even deeper one) may delay a much-needed economic adjustment in the long term. But the problem is that, as MPC members can't fail to notice if they've a moment to glance at the portents from Japan, if the return to "normal" never comes, a short-term sticking plaster can become a long-term crutch. That will no doubt have been just one of their concerns last week when they opted not to increase QE.
The comparison with Japan's case is not exact: here, it's the banks and heavily indebted households that are being kept alive by cheap debt, rather than our exporters, many of which have healthier balance sheets.
But in a recent speech King gave just one alarming example of how low interest rates may be distorting the world. No one yet knows whether rocketing house prices in the late 1990s and early 2000s reflected a sensible adjustment to a fall in long-term borrowing costs or a drastic misjudgment on the part of Britain's householders about their future earnings potential. "Since long-term interest rates in financial markets are, if anything, even lower today, the question of sustainability has not yet been resolved," he warned. Housing may still be overvalued; but we can't tell, because cut-price mortgages have (rightly) helped to avoid the wave of repossessions that might have followed if the Bank had been less aggressive in cutting rates, and keeping them there.
Eventually, King insisted, fiscal policy would have to tighten to something more like normal. But as Sharp's plight in Japan shows, even without a radical rise in interest rates, a long period of bumping along the bottom may reveal that the answer to King's "question of sustainability" is not the one homeowners had hoped for. Reported by guardian.co.uk 58 minutes ago.
Anyone who, like me, grew up in the 1980s, will remember Japanese technology as being at the height of hi-tech fashion. Panasonic, Sony and Sharp all symbolised the cutting edge of innovation and style, perhaps most thrillingly when Sony introduced the Walkman – imagine, a stereo you could listen to on the move!
Despite the catastrophic Japanese economic collapse in the late 1980s that led to the so-called Lost Decade (which has lasted far longer than 10 years), many of these firms managed to hold on to their position as export powerhouses. And while their country dipped in and out of recession, Japanese carmakers once written off as purveyors of cheap-but-clunky boneshakers (not least when Alan Partridge called the Lexus a "Japanese Volvo"), have moved up the value chain to turn out sleek, desirable vehicles.
But it's many years since Japan's corporate giants were setting the pace. From Silicon Valley, where Apple designs one whizzy must-have after another, to South Korea, where nimble Samsung is throwing billions of dollars at innovation, Japan's firms have been outflanked. China is cheaper – and itself following the same path, from undercutting rivals on cost, to designing its own technology – while Korea, Taiwan and the US continue to innovate.
Japan's giants are struggling to maintain their dominance. Sharp was forced to warn recently that it has "serious doubts" about its ability to continue as a going concern. President Takashi Okuda said: "We have a lot of great technology which we want to tap to revive and generate profit, but the company does not have that vitality." Panasonic and Sony have issued grim profit warnings. Official figures to be published tomorrow are likely to show that the Japanese economy as a whole slid into the red in the third quarter of 2012, once the momentum of post-tsunami reconstruction began to subside; and many analysts are expecting a second negative quarter at the end of the year, which would mark (yet another) recession.
The Organisation for Economic Co-operation and Development predicted last week that a declining working-age population and the rise of powers such as China and India mean Japan will contribute just 2% of global GDP in 2060; in 2011, it was 7% .
There are plenty of reasons for the woes of the Japanese industrial sector, not least that independent directors are few and far between, and cross-shareholdings – one company owning a chunky stake in another – remain common. Briton Michael Woodford discovered the perils of trying to impose western corporate values on a Japanese firm when he exposed a financial scandal at camera-maker Olympus,
which he had been brought in to run, but was duly dumped and later excoriated by its chairman for showing "dislike of Japan".But as John Plender pointed out in the Financial Times last week
, there's another explanation for the country's flagging performance: its economy has been wrenched out of shape by many years of rock-bottom borrowing costs.Quantitative easing, the drastic policy of pumping electronically-created money into the economy, was part of the Bank of Japan's armoury long before it was unleashed in the UK in the teeth of the credit crisis.
Driving down the cost of borrowing to bolster demand and staunch the flow of bankruptcies and job losses is the textbook response of a central bank facing an economy in crisis. Once growth returns, the argument goes, debt levels can be brought down and necessary restructuring take place at a less painful pace.
But over time, as cut-price loans become the norm, the corporate sector can become crystallised in its existing shape, too insulated from the cold winds of competition and progress that might have swept many firms away, or forced them to adapt to a different world, in a process the economist Joseph Schumpeter
described as "creative destruction". By delaying the reckoning, and keeping "zombie companies" alive, there is a risk that when it eventually comes, the correction is even more dramatic.Bank of England governor Sir Mervyn King is well aware of this dilemma: keeping the economy afloat in the short term (or in the UK's case, preventing a deep recession becoming an even deeper one) may delay a much-needed economic adjustment in the long term. But the problem is that, as MPC members can't fail to notice if they've a moment to glance at the portents from Japan, if the return to "normal" never comes, a short-term sticking plaster can become a long-term crutch. That will no doubt have been just one of their concerns last week when they opted not to increase QE.
The comparison with Japan's case is not exact: here, it's the banks and heavily indebted households that are being kept alive by cheap debt, rather than our exporters, many of which have healthier balance sheets.
But in a recent speech King gave just one alarming example of how low interest rates may be distorting the world. No one yet knows whether rocketing house prices in the late 1990s and early 2000s reflected a sensible adjustment to a fall in long-term borrowing costs or a drastic misjudgment on the part of Britain's householders about their future earnings potential. "Since long-term interest rates in financial markets are, if anything, even lower today, the question of sustainability has not yet been resolved," he warned. Housing may still be overvalued; but we can't tell, because cut-price mortgages have (rightly) helped to avoid the wave of repossessions that might have followed if the Bank had been less aggressive in cutting rates, and keeping them there.
Eventually, King insisted, fiscal policy would have to tighten to something more like normal. But as Sharp's plight in Japan shows, even without a radical rise in interest rates, a long period of bumping along the bottom may reveal that the answer to King's "question of sustainability" is not the one homeowners had hoped for. Reported by guardian.co.uk 58 minutes ago.