In Japan’s recent Upper House elections, the ruling LDP-Komeito coalition under Shigeru Ishiba lost its majority (barely) but a more striking result was the success of the populist-right Sanseito party, which won 14 new seats in the Upper House. Like its German cousin AfD, Sanseito proposes a sensible mix of policies including strong opposition to foreign immigration and Chinese tourism. Ishiba must not repeat Chancellor Friedrich Merz’s gross error of allying with the Socialists to keep out AfD; the opposite alternative, embracing Sanseito, will produce better policy and much better long-term results for Japan.
Last week’s results represent yet another failure of the left-globalist policy mix that has ruined lives throughout the Western world (including Japan, a wealthy country). Whatever the marginal benefits of free trade, they are hopelessly outweighed in terms of ordinary people’s living standards by the gigantic social and economic costs of unrestricted migration. Demonizing those who point this out or even throwing them in jail as in Britain merely drives an infuriated populace into extremist parties that reject the globalist mantra. Allying with economy-destroying socialists to combat the new populist forces then reinforces the damage – it is a vicious circle of the most unrelenting kind. Germany, having suffered for more than a decade under the East German apparatchik Angela Merkel, is about to discover this through the misdeeds of Chancellor Merz. Japan would do well to avoid it.
Unlike Germany, whose isolationism and chauvinism twice led the world into destructive war, thereby leading to an economically and socially destructive guilt complex, Japan has an isolationist policy tradition far predating the 20th century wars, that it would do well to nurture and preserve. Its Shogunate instituted a policy of non-contact with the outside world in 1639, that it successfully kept in place until 1868. Yet, while a backwater, Tokugawa Shogunate Japan was not an impoverished one; its standard of living around 1860 is estimated to have been around twice that of China or Russia and close to the less developed regions of central and Eastern Europe. Moreover, late Shogunate Japan’s technological knowledge and understanding of markets was much closer to that of 1700 England than of mediaeval Europe.
The generator of Japan’s healthy late-Tokugawa economy was the Shogun Yoshimune (Shogun 1716-45), of whom I wrote last year.
Yoshimune realized that the prosperity of the previous Genroku period was thoroughly unhealthy, with wealth concentrated in big cities and rich merchants displaying socially destabilizing vulgar ostentation. Therefore, he imposed sumptuary laws on merchants, reformed rice distribution so that peasants received more of the value from their output and encouraged peasants to take up “by-employment” beyond farming which would be free from exactions by the local daimyo feudal lords. Consequently, Japan became a haven of rural entrepreneurship, with for example the low-status peasant Yoshimasa (1807-71) (father of the great Eiichi Shibusawa) making a very good living through wholesaling indigo balls to textile dyers. Yoshimune also changed the restrictive rules to allow the importation of foreign books, so Western industrial and scientific progress did not go unobserved.
Yoshimune’s Japan was in most respects the national ideal for Japanese people today, with few foreigners but relatively high living standards and substantial technological capability. Sanseito’s policies hark back to that tradition; they are far more in tune with Japanese culture than is lowest-common-denominator globalization. Not only would a Yoshimune policy resist fiercely the attempts of the cheap labor lobby to import Third World riff-raff and thereby depress Japanese living standards, but it would also resist the blight of overtourism. In Japan’s crowded society, poorly understood by visitors, overtourism has become a real problem, especially as a high percentage of the tourists are uncouth cheapskate Communist Chinese. A Yoshimune Japan would choose dignity and isolation over the cheap dollars of the tourist industry, particularly at the low end of the market, where the dollars are few and the tourists especially obnoxious.
Japan today suffers from several economic pathologies that a wise government will address, but a weak LDP/Komeito administration, seeking votes from leftist parties in the Diet, certainly will not. Having foolishly listened to the charlatan Ben Bernanke in 1998, Japan now has a central bank that owns a substantial portion of both its government debt and the stock market. It has also suffered from two decades of negative real interest rates and for much of the time negative nominal rates. Now inflation has reappeared, which has the benefit of halting the relentless rise in Japan’s debt to GDP ratio, but has pushed real interest rates further into negative territory. The 30-year distortion of market signals for Japanese investors in stocks and real estate thus continues.
The distortion of markets is exacerbated by the Bank of Japan’s ownership of public debt and shares. Currently, the Bank of Japan owns about 7% of the market capitalization of the Tokyo exchange, including a very high percentage of the country’s Exchange Traded Funds (because they form an efficient way for the Bank to buy stock without favoring one company or sector) – it is now the largest institutional shareholder. In addition and perhaps more alarmingly, as of last September it owned 52.6% of outstanding government bonds. In both markets, prices are distorted by the Bank of Japan’s holdings, thus far above those dictated by a free market. If interest rates rise, the Bank of Japan will make colossal losses, far larger in terms of the economy than the recent losses of the Fed.
The effect of all Japan’s money printing has finally after three decades been to drive down the yen’s value against the dollar – at ¥147 to the dollar today, it is worth a third less than a few years ago, when the rate was around ¥100=$1. That is why Japan is full of Chinese and other tourists – suddenly it has become a relatively cheap country to visit. More alarming is the behavior of consumer prices, which in June were up 3.2% on the previous year, a higher rate of inflation than in the United States. With the 10-year Japan Government Bond yielding 1.51% today, real interest rates are still sharply negative, pushing inflation upwards and further distorting price signals for Japanese industry and investors.
Given the data, it looks likely that Japanese inflation will rise further and at some point, interest rates will rise to give a positive real yield over inflation. Such a development would undoubtedly lead to a crash in the still overvalued stock market and rising discontent among the populace, as well as a severe financing crisis in the Bank of Japan. Should the current government’s policy of increasing immigration continue, there will be an inevitable further downward push on wages, which in real terms are already declining.
The popular policy at that point, and the economically correct one, would be to follow Sanseito and Yoshimune and revert to a policy of foreign exclusion and encouragement of small-scale domestic development. A Yoshimune policy would squash the conspicuous consumption of foreigners and the very rich, and devise ways to encourage small business creation throughout Japan, not just in the overstuffed megalopolis of Tokyo. For such an effort, foreign bankers, with their greed, short-termism and favor for large-scale “churn” in corporate ownership, are thoroughly detrimental. Foreign meddling in Japanese markets by U.S. private equity and hedge funds would thus be heavily discouraged, as it plays merry hell with Japan’s stable corporate structure and introduces unpleasant American tendencies into business life. The corporate ideal for Japan to aim at should be Ajinomoto, created in 1907 by Kikunae Ikeda (1864-1936) to exploit the hitherto unidentified “umami” flavor in monosodium glutamate; today a $25 billion company and wholly independent with only minor takeover activity in its history.
On immigration Japan should revert to its traditional policy of discouraging almost all immigration. High-skill immigration introduces unpleasant foreign practices into the Japanese economy; low-skill immigration impoverishes ordinary Japanese, as well as discouraging automation and robotics, in which Japanese industry is supremely skilled. Tourism should also be discouraged, except at the highest level to allow scholars to profit from understanding Japan’s uniquely beautiful civilization.
There is no question Japan’s political life could benefit from alternation of parties in government. However, switching to the socialists achieved nothing in 2009-12, and would add little to the perpetual government of the already fairly socialist LDP. Instead, let us hope for a government with a strong Sanseito representation. By deglobalizing, a policy in line with the latest international trends, such a government could improve the living standards of ordinary Japanese and thereby slow or halt the country’s demographic decline (because prospects for the future would be improved). It would also preserve Japanese culture from foreign invasions, through immigration, mass tourism or short-termist American financial chicanery.
The optimum road ahead is clear; let us hope that Ishiba has the wisdom to take it.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)