Posted on 16 March 2013.
The bourgeois financial press has been expressing concern since the beginning of this year about the intention of the new Japanese government to adopt economic measures that promote a target of 2% inflation rather than the deflation that has characterised the Japanese economy for some time now. The Japanese government justifies its stand as being an attempt to reduce unemployment, to get the unemployed back to work; but many analysts have taken the view that it is a ploy to weaken the exchange rate of the Japanese yen in order to make Japanese exports cheaper for foreign buyers while imports from abroad would become more expensive.
The Financial Times of 7 February (Michael Steen and Alice Ross, ‘Draghi move fuels currency war fears’) writes that “ With central banks around the world adopting ever looser monetary policies and in some cases, like Japan, bowing to overt political pressure to do so, concerns have grown of a series of competitive devaluations dubbed a currency war as nations try to ensure their exports remain competitively priced .” There have been dark warnings that starting such a ‘currency war’ would be to repeat ‘mistakes’ made in the Depression of the 1930s, when under the pressure of crisis, governments succumbed to a ‘currency war’ – beggar-my-neighbour policies which in the view of certain analysts did nothing but exacerbate the crisis.
What the Japanese government is seeking to do, however, is only the same thing as the US Federal Reserve and the European Central Bank are doing. In fact they are continuing a policy that Japan has been pursuing for several years in their desperate attempts to restore profitability to what capitalists consider an acceptable level. What is being proposed is that the Japanese Central Bank does what bourgeois analysts call “ expanding its balance sheet“, a process that they tell us can be effected by printing more banknotes.
It is, however, not obvious how printing banknotes can expand a bank’s balance sheet. Any organisation’s balance sheet “balances” the money that has been received (from wherever it has been received) with what this money has been spent on. The “Assets” side of the balance sheet lists exactly where all the money received is to be found.
A bank will have received money from the following sources:
- Share capital: Its shareholders will have provided large sums
- Loans of various kinds. The bank will have borrowed even larger sums. Technically all money deposited at the bank by account holders is money borrowed by the bank. A wage worker whose salary is paid into the bank effectively lends his salary to the bank, on terms that he can claim repayment from the bank on demand whenever he chooses
- Interest payments received and capital gains on any investments it sells
- Operating profits
All the money it receives it must account for on the assets side of its balance sheet. Again this will be divided into sections in which we can expect to find:
- Property holdings, both in land and other tangible assets
- Assets purchased, i.e., various potentially interest and capital gains bearing investments, such as stocks and shares and government bonds (i.e., loans to government)
- Holdings of precious metals
- Money lent out and liable to be repaid to the bank (e.g. mortgages and overdrafts)
- Money held in accounts at other banks (at home or abroad)
- Cash (in home or foreign currency)
All the items on either side of the balance sheet are accorded a monetary value which reflects their market value (insofar as is practicable, bearing in mind that market values are in a state of constant flux and are only really put to the test in the event of an actual sale or purchase).
If a bank sets the printing presses rolling to print a pile of money (say £1m), it does not thereby create any wealth, and there is therefore nothing which should by rights be entered on the balance sheet in respect of this £1m. If, however, the bank treats this nil-worth paper as though it actually had the worth of the sums printed on it, i.e., £1m, and lists this £1m as a value it has received and is therefore entitled to spend, the net effect is to inflate the real monetary values shown on the liabilities side of the balance sheet (i.e., the items other than the valueless printed paper) to enable them to meet the values of the assets they represent. However, the assets on the balance sheet remain unchanged as far as their inherent worth is concerned, even though the money values representing them have increased. It is only monetary expressions of value which have inflated, nothing else.
Reasons for ‘balance sheet expansion’
The purpose of this inflationary ‘balance sheet expansion’ is to endeavour to counter the effects of the crisis of overproduction that it is inducing paralysis throughout the capitalist system, hobbling capitalist economies throughout the world, bringing hardship and exacerbated misery to millions of toilers and even wiping out many a capitalist fortune and hurling masses of smaller capitalists and petty-bourgeois into the proletariat. The idea is to try to get the economy moving again by giving an artificial stimulus to demand – putting money in people’s pockets so that they can go out and buy the products of capitalist enterprises, which can then start employing more people, putting more money in workers’ pockets, and setting the whole economy back into a healthy motion. That’s the idea, but it rarely works; and if it does work, it doesn’t work for long. But, hey, everybody’s doing it, so why not Japan?
Were it not for the profiteering necessities of the capitalist system, one would be inclined to think that the Japanese economy was in good shape. It produces a tenth of the world’s GDP and is the world’s third largest economy. Not bad for a country of some 128m people:
“… Despite little growth in GDP per capita since 1995, it is a wealthy country. In 2010 [the author almost certainly meant to say 2011], GDP per capita was still more than that of France [$42,377.42], Germany [$44,059.83] , the U.K.[$39,038.46]and Italy [$36,102.86] . And China’s economy is now larger than Japan’s because of its huge population, 1.3 billion compared with 128 million, though China’s $5,414 GDP [$5,444.785] per capita is only 12 percent of Japan’s $45,920 [$45,902.67].” (Gary Shilling, Bloomberg, ‘Japan’s Debt Sustains a Deflationary Depression’, 5 June 2012 – the figures in square brackets are the World Bank figures for 2011).
These healthy numbers, however, cannot be taken to indicate that a country is doing well within the context of capitalism. The most egregious example of this is provided by Ireland – a country which was forced to accept bailouts from Europe and the IMF as a result of its sovereign debt having escalated following the Irish government’s rescue of its banks, and is currently implementing horrendous austerity measures in its attempts to reduce public debt. Curiously, Ireland’s per capita GDP stands at $48,423.21 according to the World Bank, higher than that not only of Japan but also of the US. Of course, if a person has an income of £1m a year from which he needs to pay debts of £50m plus interest, he is going to struggle. But the question has to be asked: how could a person earning £1m a year run up such huge debts? The same has to be asked of Ireland. And the answer will be found in the latter case in the attempts the Irish government made to buy Ireland’s way out of the capitalist crisis of overproduction, the very same attempts now being made by Japan, and almost all other capitalist countries.
Japan’s problems arise from a phenomenon peculiar to capitalism, namely, the tendency of the rate of profit to fall. Because value in the final analysis depends on the amount of socially necessary labour time taken to produce a given commodity (the commodity requiring more labour time being proportionately more valuable than the one requiring less), the source of all new value is labour. However, in the interests of winning the battle of competition, capitalists are forever replacing men with machines in order to cheapen their products. When they do this they initially are able to make a killing since the prevailing price for the commodities in question will still reflect the labour times that would have been required under the older production methods.
However, once the new machinery becomes the norm, prices fall to reflect the smaller amount of labour time required. Thenceforth the capitalist has to produce far greater quantities of the same commodity to make the same amount of profit as before while at the same time his costs of production (his capital investment) has increased through having to buy the new machinery and plant as well as more raw materials. Thus, even if he is making the same profit as before, his rate of profit in relation to capital invested, will tend to fall. To maintain the rate of profit, he must produce exponentially more than he was producing before. He has to run in order to stand still. Capitalist production needs to expand constantly. If it remains level, it is said to have stagnated and stagnation spells crisis.
When one looks at Japan’s growth, it becomes apparent where the trouble lies:
This growth rate is simply in the doldrums. Since 2008 Japan has had three triple-dip recessions, to which the Japanese government has responded by borrowing huge sums of money in order to boost demand mainly by engaging in public works, thereby running up a record public debt that is more than double GDP, a world record! Meanwhile the country is running a persistent and worsening trade deficit:
“Japan’s trade deficit nearly tripled in 2012 to Y6.93tn ($77bn), an unprecedented shortfall for the traditional export powerhouse ….
“ The sharp expansion of the deficit, from Y2.56tn in 2011, is a reminder of the increasingly complex challenges facing Japan’s economy ” (Jonathan Soble, ‘Japan records its largest trade deficit’, Financial Times, 25 January 2013)
Jonathan Soble goes on to explain some of the reasons for this deficit as follows:
“ Thursday’s trade data highlighted just how sharply the country’s global trade position has deteriorated. In December, exports were down 5.8 per cent compared with the same month a year earlier, while imports rose 1.9 per cent.
“Exports to China, where some consumers have been shunning Japanese products amid an international dispute over control of islands in the East China Sea, fell 15.8 per cent, but shipments to Europe and the US were also down.
“Depressed exports are not Japan’s only problem. The country has been forced to import more liquefied natural gas and other fuels to compensate for the steady shutdown of most of its nuclear plants after the Fukushima accident in March 2011.
“ Currently only two of its 50 surviving reactors are generating electricity, resulting in an LNG import bill that was 8.3 per cent higher in December than it was a year earlier. For all of 2012, imports of all goods and services rose more than exports fell.”
Even more serious than the trade deficit, which has been worsening for some time, is the current account deficit, which sets the whole of the country’s income from abroad (not just from trade but also its returns from investments, which are considerable) against the whole of the country’s expenditure abroad, including not just imports but also debt payments. Recent news on this front is fairly shocking:
“ The world’s third-largest economy has run a surplus in its current account, a measure of trade in goods, services and investments, for several decades - meaning it ‘ s earning more from exports and investments abroad than it spends at home. In fact, Japan the world’s biggest creditor nation.
“The surplus has been in the spotlight recently, since Japan also has the developed world’s biggest debt load, now nearing a quadrillion yen ($12.5 trillion) - more than double its gross domestic product. As long as the current account surplus remains, economists say, Japan is in little danger of a Greek-style crisis, since its debt is largely being funded by household savings.
“While that remains the case, Japan reported Thursday that the seasonally adjusted current-account was in deficit in September - for the first time in more than 30 years. The sudden surprise drop has some economists warning that Japan’s ability to generate wealth is eroding faster than expected, and its fiscal situation could be more fragile than many had thought .” (Mitsuru Obe and Phred Dvorak, ‘Japan current account turns negative’, Wall Street Journal, 9 November 2012)
So, while Japan’s trading and current account figures are quite brilliant compared to those of the UK, let alone the US, the Japanese economy is nonetheless in serious trouble.
Attempts at stimulus are not new
The first thing to note about Japan’s attempts to revive its flagging economy have not just suddenly begun now with the election of a new government. Attempts to stimulate the economy have been going on for very many years, but have always met with little success. Michiyo Nakamoto tells us that “ The latest stimulus package brings the total amount of government money spent on 14 emergency programmes since 1999 to more than Y75tn, according to Mizuho Securities. The additional spending will exacerbate Japan’s deteriorating fiscal health as gross government debt is already at 220 per cent of GDP ” (‘Japan unveils Y10.3tn stimulus package’, Financial Times, 12 January, 2013).
More detail of the Japanese government’s attempts to force demand back into the economy since 1990 are given by Wall Street economist Gary Shilling ( op.cit.): having first attempted to maintain demand in the economy, following the bursting of housing and stock bubbles in 1989, the Japanese central banks “ slashed its reference overnight rate to zero and has kept it close to that level ever since. That pumped money into the economy, to no avail.” It seems that Japan was suffering from deflation (falling prices) so people did not want to borrow money to buy now, even though borrowing was cheap, because tomorrow the prices would be lower.
Subsequently “Substantial quantitative easing by the BOJ [Bank of Japan]through purchases of government bonds didn’t help much, either. Nor did the 3 percent annual increase in M2 money supply over the last two decades. And so far, the central bank’s attempts to promote borrowing haven’t worked: The trend since the mid-1990s has been to repay loans that weren’t written off”. All these measures caused the Japanese national debt to escalate to its present stratospheric level, but did not succeed in stimulating the Japanese economy. Deflation in Japan persisted through all the strenuous and expensive attempts to reverse it.
In the meantime, the government has run up debts which are costing more and more to service, this being part of the reason for the emergence of the current account deficit that Japan suffered in the third quarter of last year.
Is Japan engaged in stimulating its economy or competitive devaluation, or both?
While stimulating the economy is generally considered to be a right and proper thing for a bourgeois government to try to do, devaluing one’s currency in order to gain a competitive edge for one’s own commodities at the expense of those produced by other countries is, it would seem, against the rules. And it is alleged by some that breaking these rules is the prime motivation behind ‘Abenomics’, i.e., the economic prescriptions of Japanese prime minster Shinzo Abe. According to the Financial Times of 14 February (Robin Harding, ‘Currency farce reveals US-Japan dispute’), “ In December last year Mr Abe said Japan must print more money because ‘ it makes a big difference whether the yen is at 80 to the dollar or 90 to the dollar’. At one point his finance minister said the yen ‘is making headway towards the appropriate level’.
“Comments like that are seen as outside the rules of the G7 game, where it is acceptable to use domestic monetary policy to target inflation at home, but not to do so via the exchange rate”.
Were Japan to succeed in inducing a measure of inflation into its economy (in line with the inflation that characterises almost all other capitalist countries), this might, as a side effect, quite possibly affect the exchange rate of the Japanese yen for other currencies. In the absence of inflation, the yen has become a convenient parking place for money that is not currently in use – even if interest rates on offer are very low. Because of this it remains greatly in demand. When yen are later reconverted to other currencies that have inflated, it can often be converted at a profit! Therefore of course demand for the yen is high.
Furthermore, with Japan consistently earning more than it is spending (with the exception of last September’s unfortunate deficit, which may yet prove to be a one-off), the risk of Japan defaulting is negligible. Even if interest rates rise, Japan is one of the world’s major lenders, and its income will be made up to some extent by interest rate rises. That being the case, then, the yen is actually artificially boosted by a yen bubble, which, even if modest by the standard of economic bubbles, is still nevertheless damaging Japan’s exports.
This, of course, did not prevent an outbreak of hysterical outbursts against Japan’s proposed balance sheet expansion, leading to competitive devaluations that were one of the many features of the 1930s depression. “ The currency has fallen by more than 15 per cent against the dollar since November, when the election that brought the government to power was called. That has prompted officials in Europe and Latin America, in particular, to warn that a “currency war” could develop if other countries seek to devalue their own currencies to keep their economies competitive “, noted Jonathan Soble of the Financial Times, (‘GDP data reveal Japan mired in recession’, 14 February, 2013).
However, other countries are in no position to point the finger at Japan in this respect: “…competitive quantitative easing by central banks is now the order of the day, and the BOJ is being outrun. Last year, it expanded its balance sheet by 11 percent, while the Federal Reserve’s increased 19 percent, the European Central Bank’s rose 36 percent and the Swiss National Bank’s grew 33 percent “. (Gary Shilling, op cit).
In fact, Britain is least in a position to complain about other countries’ efforts:
“If we accept that countries are indeed trying to gain competitive advantage through devaluation, then of course Britain is one of the worst offenders. At Wednesday’s Inflation Report press conference, Sir Mervyn King, Governor of the Bank of England, aired some apparently shocking numbers. Since the financial crisis began, not only had interest rates been reduced to close to zero, but the Bank of England’s balance sheet had been expanded by a factor of five.
“Expressed as a share of GDP, the increase has been greater than that of the US, greater than that of the European Central Bank, and greater than that of Japan ” (Jeremy Warner, ‘Countries are using devaluation to gain an advantage – and Britain is one of the worst offenders’, Daily Telegraph, 14 February 2013).
Quite rightly Jeremy Warner points out:
“ In any case, in today’s world, with its interconnected supply chains, devaluation is pretty much a zero sum game, as we are discovering to our cost here in Britain. Notionally, it helps exporters, but by raising the cost of imports, it adds to input inflation, which, in turn, damages living standards, crimping domestic demand and ultimately hitting the cost competitiveness of exporters.
“All the complaint about currency wars is therefore basically just a lot of political hot air. If countries are to be allowed to stimulate growth – and after more than two decades of going nowhere, it seems entirely reasonable that Japan should at least be allowed to try – they are bound to take monetary action that will have consequences for the currency ” (ibid.).
A G20 Summit which took place in Moscow from 16-19 February, at which various participants might well have wanted to censure Japan for effectively weakening its currency, appears to have eventually decided that stimulus measures are all right and to be expected. They may well bring currency devaluations in their wake, but provided this was not the main reason for them, it is still in order to implement such measures. What is very important, however, is for governments not to actually openly say that these measures will weaken their currencies. In other words, the G20 meeting that was supposed to resolve the issue ended up, in the words of Robin Harding, having “at times appeared to be the product less of a currency war than a currency farce” (‘Currency farce reveals US-Japan dispute’,Financial Times, 14 February 2013).
For his part, Mr Abe is no doubt happy to take on board the suggestions as to how he should present his motivation, and he has been stressing that his purpose is to urge the banks to lend more so as to create employment in Japan. This will be popular with the Japanese electorate. Unemployment rates went from a low of 1% in November 1966 to a high of 5.6% in July 2009. More to the point, whereas unemployment between 1956 and 1994 never exceeded 3%, since 1999 it has rarely fallen below 4% and has often surpassed 5.5%, striking a mortal blow to Japanese traditions of jobs for life allied to unfailing employee loyalty to employers arising from a naive belief in employer loyalty to employees.
No cure within capitalism for a world crisis of overproduction
No amount of tinkering with balance sheets can in the end bring about an escape from the crisis. All that governments can in fact do is to attempt to ‘beggar their neighbours’ by trying to cheapen their own monopolies’ products in order to take over the dwindling markets to the detriment of their neighbours. A fall in the Japanese currency exchange rate may well drive up the exchange rates of other currencies and render products from the countries concerned less competitive. Each country, therefore, behaves just like each corporation – endeavouring to survive while around them all others collapse.
However, the downward pressure on wages and government spending necessitated by the need to minimise costs of production, simply ends up reducing effective demand for products (people may want them, but have no money to buy them) and exacerbates the crisis. After wreaking horrendous destruction on the economies of all capitalist countries, heaping untold misery on the working class and oppressed masses, unleashing a myriad of wars of unparalleled violence threatening the very survival of the planet, the crisis burns itself out and the economy picks up again for another few years. It is because of this that socialism is a question of survival.