Two weeks ago Japan did something to its economy the effects of which will be felt all over the world. It dropped it’s official interest rates from zero to negative. Why? To answer that question we need to take a trip down memory lane.
Kill Me Now! – Unknown origins.
I’ll summarise for you.
In the 1950s Japan quickly shifted it’s manufacturing into gear and by the 1960s it was recovering from the devastation of WWII. By the 1970’s, Japan’s manufacturing brought it into the developed world and by the 1980’s it was the 2nd largest economy on the planet (behind the US). It’s stock market took off but then – by the early 1990’s – the party was over. The stock market had crashed, property prices had been devalued and unemployment (unheard of in Japan’s corporate culture) took hold.
Sound familiar, it should. The Chinese economy has gone through similar upheavals – albeit on a much larger scale. Japan then underwent a two decade long recession. That is not a misprint. Drastic action was required. Many attempts to kickstart the economy failed.
Japanese households were keeping their wealth in cash. How to provide an incentive for them to invest? Charge them for keeping their money in the bank.
Now the above is overly simplified but you get why the Japanese are doing what they’re doing. You cannot have one of the world’s wealthiest nations unable to use its wealth. The Japanese refused to take hard decisions and let the recession take hold.
Compare that to the Americans post GFC. Hard decisions were taken (rightly or wrongly). It allowed a line to be drawn under the pain of the GFC, it’s currency was hammered lower by currency markets and the US was able to grow its economy.
The Europeans took a different path – similar to Japan. So, what are the chances of rates falling to negative in Australia? Very small. We’re fortunate enough to have our currency track the rise and fall of our key economic output. Resources (or at least that’s what the world’s currency markets perceive it to be. The reality is different).
When resources prices were high our dollar followed. Now that they’re low, the currency has followed it down. It provides a shock absorber for our economy. Japan’s currency did the exact opposite as Japanese investors brought their money back to Japan, they put upward pressure on the YEN.
If Greece had it’s own currency, instead of the Euro, collective economic wisdom suggests it would recover much quicker and undergo less pain. Although, it would still require massive structural changes to achieve such an outcome. Also, Japan was a creditor country. This meant that it provided funding to the world. We’re a debtor country. We borrow to meet our expenditure shortfall. Although, that has to come to an end sooner or later.
How? Higher taxes or lower expenditure. My money’s on higher taxes as expenditure can only be cut so much and you risk taking the country into recession (from weak growth) if more money is taken out of the economy.
So next time you look at how much your deposits are earning in a bank account (probably very close to zero), maybe it’s time to think about using that cash more prudently.