In line with Abe's goal of creating inflation that the Bank of Japan is now resorting to introducing the negative interest rate for its customers - namely commercial banks - for keeping their deposits. As of January 29, the central bank will charge 0.1% p.a. on the new deposits of commercial banks kept with the central bank. Luckily, the negative interest rate does not apply to ordinary customers at financial institutions.
The idea is to discourage commercial banks from being prudent and to encourage them to lend to ordinary people so that they will spend more money and increased the demand for goods and hence raise prices in general. But this is a foolhardy task.
Japan has been suffering from deflation for a quarter of a century since the burst of the asset bubble in 1991 after the introduction of the newfangled technique of quantitative easing in 1986. The QE was introduced to reverse the sharp appreciation of the yen forced on Japan by the US in the Plaza Accord. The US economy was weak and it accused Japan of undervaluing its yen.During the asset bubble, the stock market and the real estate market rose to unprecedented heights with banks giving out housing loans that required three generations to pay. The bubble burst when the central bank feels that speculation in the markets had gone mad and there was a need to stop that. The markets collapsed when credit tightened and interest rates rose.
The fact that the Japanese economy has slowed and deflation has continued for so long point to the problems at the banks. With such huge non-performing loans affecting millions of people, the government just cannot push for foreclosures to solve the problem. It would put the entire banking system and the population into bankruptcy. At the same time, the high yen had forced Japanese multinationals to go abroad to places such as Malaysia and thus leaving a vacuum in the SME sector consisting mainly of family-owed companies. Japan hasn't so far recovered from this structural shift.
It is natural that nominal wages have not risen in the midst of weak labour demand, and therefore there is no scope for real estate prices to recover. Instead, real estate prices are looking for the correct level of nominal wages, and if this could not be found at home, then they will have to wait for stronger foreign buyers. Japan has no opened its doors to foreign tourists and it won't be long before these tourists fall in love with the lovely Japanese manicured townships and buy them up, especially those from China.
Lessons for Us
For us here at home, we must recognise a structural problem when we see one, instead of thinking that we are still dealing with a temporary marginal demand adjustment problem.
The impending rise of global interest rate, although the idea is somewhat challenged by Japan's interest rate, and the shift of global money flows in light to that expectation is a structural shift which we have not see before. This is coupled with the adjustment of the oil price back down to normal which should put an end to the grandiose schemes by the government in using demand management to support an income that is not sustainable.
The government here should really cut down on its expenditure so that it does not have to support the huge foreign worker population. The increase in the foreign worker levy is a right move. But the government must cut down on the operations of the government. Senior government servants are paid exorbitant salaries (perks included) for prestige but not talent. They should be given titles that befit their subservient status, rather than as honoured guests in all kind of functions.
I really won't really worry about public transport. With the recession, there will be less cars on the roads. The public transportation in any case does not serve those who drive fancy cars. I think real estate developers should be asked to contribute to the building of the public transport to or near their properties.
Encouraging enterpreneurs is always a good idea. But how it is being done will determine its success. Entreprenuership should not be seen as a special activity that is carried out by a select group. It should be encouraged as a way of life. This calls for a change in mindset starting with policy that is open to all citizens and there are no privileges to selected groups. The system encourages the society as a whole so that everybody has equal opportunities. Those who are clearly handicapped should be helped but should in no way be allowed to obstruct the general progress of the whole society. This policy is also translated down to the banking system which should be liberated to allow for smaller boutique banks that cater to special groups rather than lumping every banking and financial functions under big lumberous megastructures.
To compete in the world ahead, the government should assume itself ignorant and therefore playin the supporting role to the private sector which must take the entire risk of their endeavours. In no way should the government guarantee the financial profitability of projects that bear great benefits to a few at the expense of many. The government should not guarantee private profit. The market rewards those who succeed and punishes those who fail. The government must not penalise those who succeed and rewards those who fail.
We at home should gear us for a few years of deflation and a slow growth. The 3% cut in the employee's EPF contribution is the clearest demonstration of the poverty of policy thinking at this critical juncture of our national economic life. Begone your naive Keynesianism. We are now in post-Keynesianism. Our budget deficit has ballooned to enormous size. The government is now trying to take more money from the people to patch up the budgetary holes. Our people are over-geared and facing unemployment. We are now in post-monetarism. Easy monetary policy has gone kaput. We are drowning in liquidity. Let us try the see things a bit clearly.