In the 20 years to 1970, the economies of Germany and Japan grew quickly as post-war reconstruction created jobs and people re-built their lives. Baby boomers were born, peace prevailed, and the European Economic Community got going. The Korean peninsula did not join in as they had to deal with the Korean war and partition. China also did not prosper as Mao Zedong embarked on a drastic economic experiment which ended tragically.
The following 20 years were not exactly plain sailing, with the first oil crisis, soaring inflation (which was eventually tamed), China’s rapprochement to the West and German unification. Big Bang in Britain and the global reach of financial services transformed much of the landscape in both the developed world, emerging markets getting a leg-up too.
In 1990 Japan’s property and stock market bubble burst, and the authorities have been struggling with the aftermath ever since. They’ve kept interest rates lower than most, and their currency as weak as they could, to give business a competitive edge. Following the great financial crisis of 2007/2008 the Bank of Japan (BoJ), like others embarked on quantitative easing (QE) and now owns the equivalent of roughly $4.8 trillion in assets, mainly Japanese Government Bonds (JGB) where it owns 45 per cent of the $9 trillion outstanding.
Despite printing all this money, last week the Bank of Japan noted that ‘the increase in women and seniors entering the job market are keeping a lid on wages, exacerbated by a push from companies towards automation, because of labour shortages’. Unemployment is 2.37 per cent, the participation rate 61.7 per cent and there are 1.62 jobs vacancies per applicant. Consumer Price Inflation, which excludes volatile fresh food, is running at just 0.8 per cent in the year to June and real wages have stagnated with zero growth for almost 30 years. No wonder the BoJ also noted that "companies and households are not accepting price hikes, accustomed as they are to low inflation, especially in retail, hotels and catering".
We can see that similar trends have been spotted in the US and Europe, the demise of the high street blamed on the internet, wages lagging and horrendous youth unemployment in some nations. This will keep a lid on CPI, especially if housing remains so expensive in major cities.
This endless grind was hinted at by Bank of England governor Mark Carney as he raised interest rates by a smidgeon, implying a "lower speed limit" for economic growth and poor productivity meant "we have to reorient ourselves to current realities" and reconcile ourselves to several "uncomfortable" aspects of the "new normal".
China is also struggling with a new reality, booming credit demand and creation setting off alarm bells, especially in the shadow banking system. Economic growth is slowing and property speculation is cooling a little. Now they’ve been lobbed a new hand grenade in the form of President trump’s trade tariffs. Cue: weaken the yuan, get interest rates down a bit, keep one’s head down and nose clean.
As the second-biggest economy in the world, and the top contributor to global growth, China’s priority into 2020 is to eradicate poverty. An annual income of 2,300 yuan (US$334) is the cut-off point and there were 43m below this level in 2015. In 2017 12.8m rural people were lifted above this line so that just 3.1 per cent of its massive population still need help. That costs money.
