The Economist

60 Finance and economics The EconomistAugust 4th 2018

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I

T IS the summer of 1979 and Harry

“Rabbit” Angstrom the everyman-hero

of John Updike’s series of novels is run-

ning a car showroom in Brewer Pennsyl-

vania. There is a pervasive mood of de-

cline. Local textile mills have closed. Gas

prices are soaring. No one wants the

traded-in Detroit-made cars clogging the

lot. Yet Rabbit is serene. His is a Toyota

franchise. So his cars have the best mile-

age and lowest servicing costs. When you

buy one he tells his customers you are

turning your dollars into yen.

“Rabbit is Rich” evokes the time when

America was first unnerved by the rise of

a rival economic power. Japan had taken

leadership from America in a succession

of industries including textiles consum-

er electronics and steel. It was threatening

to topple the car industry too. Today Ja-

pan’s economic position is much re-

duced. It has lost its place as the world’s

second-largest economy (and primary

target of American trade hawks) to China.

Yet in one regard its sway still holds.

This week the board of the Bank of Ja-

pan (BoJ) voted to leave its monetary poli-

cy broadly unchanged. But leading up to

its policy meeting rumours that it might

make a substantial change caused a few

jitters in global bond markets. The anxi-

ety was justified. A sudden change of tack

by the BoJwould be felt far beyond Ja-

pan’s shores.

One reason is that Japan’s influence on

global asset markets has kept growing as

decades of the country’s surplussavings

have piled up. Japan’s net foreign assets—

what its residents own abroad minus

what they owe to foreigners—have risen

to around $3trn or 60% of the country’s

annual GDP(see top chart).

But it is also a consequence of very

loose monetary policy. The BoJhas de-

ployed an arsenal of special measures to

battle Japan’s persistently lowinflation. Its

benchmark interest rate is negative (-0.1%).

It is committed to purchasing ¥80trn

($715bn) of government bonds each year

with the aim of keeping Japan’s ten-year

bond yield around zero. And it is buying

baskets of Japan’s leading stocks to the

tune of ¥6trn a year.

Tokyo storm warning

These measures once unorthodox but

now familiar have pushed Japan’s banks

insurance firms and ordinary savers into

buying foreign stocks and bonds thatoffer

better returns than they can get at home.

Indeed Japanese investors have loaded up

on short-term foreign debt to enable them

to buy even more. Holdings of foreign as-

sets in Japan rose from 111% ofGDPin 2010

to 185% in 2017 (see bottom chart). The im-

pact of capital outflows is evident in cur-

rency markets. The yen is cheap. On The

Economist’sBig Mac index a gauge based

on burger prices it is the most undervalued

of any major currency.

Investors from Japan have also kept a

lid on bond yields in the rich world. They

own almost a tenth of the sovereign

bonds issued by France for instance and

more than 15% of those issued by Austra-

lia and Sweden according to analysts at

J.P. Morgan. Japanese insurance compa-

nies own lots of corporate bonds in Amer-

ica although this year the rising cost of

hedging dollars has caused a switch into

European corporate bonds. The value of

Japan’s holdings of foreign equities has

tripled since 2012. They now make up al-

most a fifth of its overseas assets.

What happens in Japan thus matters a

great deal to an array of global asset

prices. A meaningful shift in monetary

policy would probably have a dramatic

effect. It is not natural for Japan to be the

cheapest place to buy a Big Mac a latté or

an iPad says Kit Juckes of Société Géné-

rale. The yen would surge. A retreat from

special measures by the BoJwould be a

signal that the era of quantitative easing

was truly ending. Broader market turbu-

lence would be likely. Yet a corollary is

that as long as the BoJmaintains its cur-

rent policies—and it seems minded to do

so for a while—it will continue to be a

prop to global asset prices.

Rabbit’s sales patterseemed to have a

similar foundation. Anyone sceptical of

his mileage figures would be referred to

the April issue ofConsumer Reports. Yet

one part of his spiel proved suspect. The

dollar which he thought was decaying in

1979 was actually about to revive. This re-

covery owed a lot to a big increase in inter-

est rates by the Federal Reserve. It was

also in part made in Japan. In 1980 Japan

liberalised its capital account. Its investors

began selling yen to buy dollars. The

shopping spree for foreign assets that

started then has yet to cease.

Made in Japan

Saving gluttons

Source: Haver Analytics

Net international investment position 2017 $trn

Japan international investment position

% of GDP

0

1

2

3

Switzerland China Germany Japan

0

50

100

150

200

1996 2000 05 10 15 17

Assets

Liabilities

Buttonwood

Its economic heft has declined but Japan’s influence on global financial markets is still strong

$8.6bn. Officials admit that much of that

money is sitting idle.

Myanmar’sSOEs are not unique in the

region in being legaciesof dirigiste military

rule. But they are probably the most

opaque and badly run. Other countries

generally require their counterparts to

publish annual reports. Thailand’s have

adopted international reporting standards.

A few in the Philippines have private mi-

nority shareholders. Malaysia uses perfor-

mance indicators for some SOEs’ manag-

ers. In China bosses’ pay is linked to

performance (which admittedly encour-

ages the fiddling of statistics).

There are a few glimmers of improve-

ment. Myanmar’s government has joined

an Asian forum on how best to monitor

SOEs. It recently rid itself of a finance min-

ister Kyaw Win who had been accused of

corruption and admitted in 2016 that his

PhDwas fake. His replacement Soe Win

may do more to promote oversight. He

used to work for Deloitte a global account-

ing firm and sits on the board of the Re-

naissance Institute.

But formidable obstacles remain. Dif-

ferent ministries are responsible for differ-

entSOEs and the finance ministry has no

control over their spending. Only Aung

San Suu Kyi Myanmar’s de facto leader

has the authority to pass reforms. But the

economy is not her priority and she tends

to tread carefully when it comes to the

armed forces’ interests.

MPs from the lower house’s public-ac-

counts committee are keen to look into the

mess says Aung Min their chair. But they

lack administrative support and in many

cases expertise. And few other parliamen-

tarians would welcome scrutiny of zom-

bie factories in their constituencies. Work-

ers in Thagaya for their part feel secure.

The factory cannot close one says “be-

cause it belongs to the government”. 7