First published in the Telegraph on 4 March 2010
Here in Japan, one of the first things everyone wants to discuss, once they find out that you’re from the UK, is the prospect of a hung parliament. The second is the collapse of the pound. The third is the disaster in Greece. They ask their questions in a sympathetic tone – not to mock or crow, but to make a simple point: we know where you’re heading, because we’ve been there ourselves.
When Japan’s crisis started just over 20 years ago, the general assumption was that prices would fall for a few months. A year on, and they were still going down. Everyone was convinced that at some point things would turn around, but they never did. Today, Tokyo’s stock market is worth barely a quarter of the value at its peak in 1989.
There are some key differences. In Japan, the pain and drama were spread out over months and years, leaving investors in a strange, Zen-like mood of disappointment. In the UK, the shocks have come hard and fast, the latest being this week’s drama over the possible election results and a terrifying fall in the pound. But Britain’s problems still resemble Japan’s in so many ways: a fiscal crisis, a rapidly ageing population, a government unable to make decisive reforms to its broken financial sector.
Japan, in other words, has become a test case for how our economy might go. The same British and American economists who used to fly in to lecture the Japanese on how to run their economy now come to learn what is in store for their own nations. I came here on a similar pilgrimage – only to find that everyone is keener to talk about the crisis back home.
This is hardly a surprise, for events have certainly been dramatic. The currency and debt markets have had such a jittery week that it has looked as if Britain could topple into the abyss it has skirted so close to throughout this crisis.
By itself, the pound’s fall on Monday to below $1.50 was unremarkable – it has been far lower before, and the speed of the fall, although rapid, fulfils the textbook definition of a currency crisis. But such comparisons to previous currency movements are misleading. The fall in the pound in the past couple of years was a blessing rather than a disaster – to the extent that a senior official in the Ministry of Finance here actually congratulated me when I told him how far the pound had fallen. It reflected the way that investors were effectively re-pricing the UK.
We can think of the level of a currency as a measure of how attractive markets think that particular country is: the general assumption over the past decade was that Britain was in great health, so the markets deemed that the pound should be strong; when that illusion was shattered, the markets responded by lowering the value of the pound by a quarter. There is a vast difference, however, between this kind of devaluation – an even-headed reassessment by international markets of your competitiveness, which has already boosted Britain’s fortunes by fattening margins and supporting exports – and what happened this week. The pound’s lurch downwards reflected not economic considerations, but a chill fear that government and policymakers have simply lost control – or have no idea.
As we near election day, expect further turbulence in the currency markets. One thing you can be fairly sure of is that there will not be a full-blown crisis, with the Government finding it impossible to sell any of its debt, before the dust has settled after polling day. Instead, the markets will deliver their verdict on the new government once it becomes clear whether its budget plans will actually get a handle on the deficit.
Contrary to some recent reporting, a hung parliament would not rule out such an outcome. Clearly, the stronger and more decisive the government, the better. But one shouldn’t presume that a coalition government could not cut the deficit. Indeed, history suggests that governments of national purpose are often best suited to doing just that. The only catch is that they usually only do so after there has been a genuine crisis to push them into it.
So, as we have known for many months, it is the markets rather than the electorate that will ultimately have the greater say over Britain’s fate. And if you resent this idea, it’s worth remembering what happened in Japan. Due to a peculiarity of the savings system, the government was able to go on borrowing and spending for two decades, because its debt was bought almost entirely by its own citizens. The result is that it has been able to stave off the pain of budget cuts – but at the cost of two lost decades, and the rising likelihood that Japan will face a crisis of debt and demography that is truly inescapable.
Britain, whose bond prices are buffeted about by investors from around the world, cannot do this. The pound’s behaviour this week was a reminder that the time for borrowing is over, and that the time to pay our debts has come. Instead of panicking or moaning, we should be thankful we have been given due warning.