Japanese gyrations

Can Japan control its latest financial difficulties?

by Sir John Redwood MP on 29 May 2013 14:36

The first response to the Japanese money burst was positive. The markets liked it, drove down the yen, and celebrated by pushing up Japanese share prices. The commentators liked it, because it was bold and exciting. The real economy responded, with more growth. Some prematurely celebrated a breakthrough for the new policy.

Then came the big sell-off last week. Share prices plunged 7.6 percent in a day. Markets recoiled in horror as bond prices fell and government bond interest rates rose, despite the very large buying programme the government had announced. The commentators started complaining that the government was contradictory. It said it intended to keep bond interest rates very low by massive buying of the bonds, but it also said it would trigger faster inflation which they thought meant higher interest rates.

The government hopes for higher inflation before it loses control of very low bond yields. It can keep on buying trying to keep the yields down. As so much of this depends on gaining or retaining market confidence, the Japanese authorities have to work on improving their forecasts and making their script easier on the ears of the investors.

Meanwhile what really matters is how quickly they develop the third arrow of their economic archery – radical supply-side reform. Only if they introduce more competition to Japanese commercial life, challenge restrictive practices and cartels, is the extra money released likely to do more good and trigger faster growth backed by rising productivity.

In the end you need more and better products which people want to buy if you are to achieve sustainable growth. No amount of monetary tinkering can replace the need for innovation, higher productivity and good design. Competitive markets usually help secure those.

This blog originally appeared on johnredwoodsdiary.com

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