Forget what you think you know
In closing, Tasker discussed some common misconceptions about Japan, and gave some hints about where it might be headed.
For one thing, Tasker said, the common conception that Japan has been maintaining persistently low interest rates for too long isn’t really accurate. Though nominal rates have indeed remained low for some time, he said, Japan has actually had positive real interest rates because of its relatively consistent deflation in recent years. “The reality is there has been a real interest rate, a significant real interest rate, in Japan, which all borrowers have had to contend with,” he said.
A related myth, Tasker said, is the old saw among many economic thinkers that Japan’s experience proves the ineffectiveness of quantitative easing (QE). In fact, Tasker said, Japan has never really attempted the kind of “full-blown” QE program that the U.S. and Britain, for example, have in recent years.
True, Japan’s adopted a policy of maintaining interest rates at zero for a time in 2001 and 2002, but headline deflation at the time exceeded one percent. “They never penalized holders of cash,” Tasker said. “Holding cash continues to be a good thing to do in Japan.”
The Fed has purchased long-term bonds as part of Operation Twist. But Japan’s approach to easing was fundamentally different. “The main focus has been buying short-term bonds off the banking system and creating current balances at the central bank itself,” Tasker said. “Though it is not zero, there has been very little purchase of long-term bonds” from nonbanks.
What’s more, Tasker said, “the mood music was completely different” – Japan’s lack of conviction in its easing programs was evident. “When they occasionally did these things, they just let the market know that they didn't believe they were going to work. And as soon as they possibly did, they would quit and start raising rates,” he said.
One knock against QE is that it leads to overvaluations, but Tasker saw that as a non-issue in Japan. It’s true that distorting effects may show up in the asset markets before they’d hit the real economy, he said, but Japan’s situation is simply not one where overvaluation should be a salient concern, he said. After all, if the Japanese market is below its 50-year moving average –Tasker told his audience – it’s hard to look at that and see overvaluation.
All of this, Tasker said, points to just how fundamentally different your outlook has to be to properly appraise the situation in Japan. It’s almost as if, for the Japanese, the passage of time isn’t a relevant variable anymore.
“It is like going back into the medieval period,” Tasker explained. “In the modern period we tend to think as years go by the world changes, and there is some kind of upward gradient. They didn't think like that in the medieval period. It was just seasons that change. The world doesn't change.”
Michael Skocpol is an editor and staff writer for Advisor Perspectives.