As I have repeatedly documented at this website, the story of Japan’s two lost decades is a myth. But if I am right, how come so many ostensibly reliable observers seem to disagree with me? There are several reasons, none of which reflect particularly well on the reliability of the Western press. Here I explain one of them.
Western views on Japanese economics have long been shaped disproportionately by a few Tokyo-based economic analysts working for “prestigious” Wall Street investment banks such as Morgan Stanley and Goldman Sachs.
Unfortunately these people are rarely disinterested torchbearers of truth. Not to put too fine a point on it, they profit from pumping misinformation into the Western press.
One example of how this works is the so-called “yen-carry trade.” This is a complex maneuver in which investment houses and hedge funds profit by talking down the yen. The more they talk, the lower the yen falls, and the bigger their profits. For much of the last two decades the yen-carry trade has been a huge subterranean force in world financial markets. On the Economist magazine’s estimate four years ago, about $1 trillion was then tied up in the trade – equivalent to about 2 percent of the value of all stock market shares worldwide. That’s a lot of money – and a lot of negative talk.
There are several variants but the basic yen-carry strategy works as follows: you borrow in yen and turn the money into dollars and earn a profit from the difference between the typically low yen interest rate and the higher dollar rate. The profits can be large given that at times yen funds have been available for little more than 1 percent a year and could earn perhaps as much as 6 percent in dollars.
It sounds great and it is – provided only the yen-dollar exchange rate does not move against you. That is an important proviso, given that since exchange rates began to float in 1972, the yen has generally ranked as one of the world’s strongest currencies. The trend has continued even during the two “lost decades” since 1990.
The facts are there for all to see: the dollar fell recently to just 77 yen, down from 143 yen in 1989, representing a cumulative rise in the yen of more than 80 percent since the beginning of the famous Tokyo stock market crash. That is equivalent to a compound rate of 2.9 percent a year – enough to take much of the fizz out of the carry trade. The yen’s tendency to rise moreover is not steady but rather occurs in occasional fits and starts — moves that can prove devastating for any yen-carry player still on board.
At first sight therefore the game looks like the financial equivalent of Russian roulette. Why therefore would anyone play? The reason is that though the yen’s upward moves may be devastating, they are relatively infrequent and, for the well connected, avoidable.
Anyone can win at the yen-carry game provided only he has inside information on the Tokyo financial authorities’ plans for intervening in currency markets. Concerned first and foremost to boost Japan’s all-important exports, Japanese officials manipulate currency markets to keep the yen as low possible. Occasionally, however, when they make a brief tactical withdrawal, the yen can rocket by 10 or even 15 percent in a matter of months – enough to wipe out anyone who has not been tipped the wink by the MOF.
In essence the game reduces to cultivating reliable sources at Japan’s powerful Ministry of Finance, the agency that oversees yen policy. There is no free lunch anywhere, of course, and the MOF expects the foreigners to bring something to the party. In this case what the foreigners bring is obvious: their “authority” in talking down both the yen and the wider Japanese economy.
From the MOF’s point of view, the investment bankers’ dissing of the Japanese economy brings several other key benefits as well. For one thing, the idea that Japan, the world’s second largest capital surplus nation, is somehow only slightly more solvent than say Somalia has had a magical effect in staunching the former torrent of begging letters Japanese companies and government agencies used to get from non-profit organizations in the West. For a nation that hates to say “No,” such solicitations were once a grievous embarrassment. More important, the idea that Japan is down on its luck has stayed the hand of foreign trade negotiators trying to open the Japanese market to imports.
Basically for both the MOF and the foreign bankers, this is a marriage made in heaven. Each side has what the other wants. It is a fair bet that those investment banks that have been most successful in painting the Japanese economy as a basket case have been duly rewarded with the most reliable information on the Japanese government’s currency market intervention plans. Meanwhile a delighted MOF has enjoyed powerful help in slowing what would otherwise have been a much more challenging rise in the yen. (The fact that the yen has been kept firmly tethered helps explain, for instance, Japan’s record current account surplus of $194 billion last year.)
Basically the yen carry trade game is an utterly unnatural, essentially Rube Goldberg contrivance – a sort of intravenous financial drip in which the MOF pumps money into the veins of a few “blue-blooded” Wall Street firms and in return the firms function as talented public relations operatives managing Western opinion on the MOF’s behalf.
The implication is that millions of ordinary Westerners are being played for fools. But what else is new? As the old “Where are the customers’ yachts?” joke makes clear, Wall Street’s fortunes and those of the American public are not closely intertwined. What is different, however, is not just the scale of the scams – they are far larger and more blatant in Tokyo – but the almost pathological cowardice of Western press correspondents in failing to take the lid off the stew. Why is the press so lily-livered? That is a fascinating question but one for another occasion.