Japanese horror stories

Japan's attempt to reverse the monetary stimulus of the 1930s was a disaster. Merryn Somerset Webb explores what went wrong, and what Britain can learn from Japan's money printing experiment.

We are constantly told we need to look to Japan to learn the lessons of crisis mismanagement. Japan can teach us what happens when you don't allow immigration; what happens when you allow deflation to take hold; what happens when you allow companies to ignore shareholders; and what happens to your exporters if you don't constantly work to keep your currency down. But there is one lesson no one in a position of authority seems to much want us to learn the impossibility of pulling back from massive monetary stimulus.

In their latest market commentary, Chris Andrew and Mustafa Zaidi of Clarmond Advisors remind us of the Japan of the 1930s. The finance minister at the time was Korekiyo Takahashi, a man who it seems is something of a hero to Ben Bernanke in 2003, Bernanke referred to him as having "brilliantly rescued Japan from the Great Depression through reflationary policies in the early 1930s".

You'll be wondering how he did this given how tricky rescuing economies from deflationary pressures appears to be these days. Simple really, say the Clarmond lot. He took Japan off the gold standard (allowing the yen to float freely), outlawed the conversion of paper currency to gold, slashed interest rates to the bone, enacted massive government spending and made it legally possible for the Bank of Japan to buy and hang on to government bonds (hello QE). It worked.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Equities boomed, the yen collapsed, exports soared and growth hit 6%. Then Takahashi started trying to get out. And it stopped working his attempt to reverse some of the QE in 1935 resulted in a failed auction, something that told him the deficit spending had to come to an end. Unfortunately for him, most of the spending was going on warfare and the military didn't much fancy any spending cuts.

The result? An irritable group of young officers, keen not to see the flow of public cash to their cause diminished in any way, hacked the 82-year-old finance minister to death. The new finance minister saw sense and continued with the spending and the BOJ bond-buying programme. Today, Japan's debt levels are among the highest in the world.

The lesson here? It's pretty obvious. Once you start a programme like this however good your intentions in the first place it is all but impossible to get out again. That's true of fiscal policy will it ever really be possible for a modern elected government to default on the welfare promises of past governments? And it is true of monetary policy too.

How can all the bonds that have been bought in by central banks ever be sold again without causing horrific disruption in the form of fast rising interest rates? As Andrew and Zaidi say, Chairman Bernanke may one day wish he had "never invoked the spectre of Korekiyo Takahashi".

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.