Charlie Chaplin and the Japanese bond market

The future all over again – satire and dictatorship

On May 15 1932 there was an attempted coup d’etat in Japan, led by a militant, nationalistic faction in the Imperial Army. The principal victim was the Japanese Prime Minister, Inukai Tsuyoshi. The perpetrators of the coup were given relatively light prison sentences, a pointer to the less democratic and belligerent Japan that would soon follow.

The bizarre element of the coup, which fortunately did not succeed was a plan to murder the actor Charlie Chaplin. The thinking was that such a deed would incite popular fury in the US, and thus lead to war, in which Japan would prevail. At the time of the coup Chaplin was watching a sumo wrestling match with the Prime Minister’s son, and thereby escaped the assassins.

This was more than lucky and in many ways Chaplin’s film The Great Dictator is a fine riposte to the destructive nationalism and totalitarianism that took hold across the world from the mid 1930’s. It is a film that still resonates today.

The view that this incident presents of Japan is also interesting. At the time, economically at least Japan was still an emerging market. Indeed the poor performance of the Japanese stock market around the second world war period is responsible for the historic muted performance of emerging markets relative to developed over the past seventy years.

While our view of Japan today is of a placid country, its history in the past two centuries is a reminder of the pitfalls of isolationism, nationalism and war – concerns that are now echoing louder across the international political economy debate. It should be said at the same time that that the post second world war relationship between the US and Japan is a good example of how two feuding countries can come together (Al Alletzhauser’s ‘House of Nomura’ is good on this topic).

That relationship is pivotal today for a number of reasons. First, a series of military equipment purchases by Japan, mostly notably of over 100 F-35 stealth fighters, manifestly aligns it as America’s fulcrum in Asia and unambiguously points to a change in its defence doctrine.

Second, as the world’s third largest economy, and a cyclical one at that, Japan is a large cog in the trade dispute between the US and China. There was a time when America feared the rise of Japan as it now does China, and any fans of economic history may know that during the 1980’s and 1990’s Donald Trump was an eminent Japan-trade basher. For those of you who want a market scare, the April 13 1987 cover of Time magazine carried an image of Uncle Sam pitted against a sumo wrestler under the banner ‘Trade Wars – the US gets tough with Japan’. The stock market crashed five months later. Does history teach us anything?

Japan may profit strategically from the curbing of China by America, though economically it will suffer from the diminution in world trade and through the side-effects of a stronger yen. In that respect, this weekend’s G20 finance minister’s meeting, lead by Taro Aso, is important as it offers an opportunity to begin to mend relations between the US and China. If this does not happen, then Japan’s bond market offers up a vision of what a trade damaged financial landscape may look like.

Last week, Japanese two year bond yields dipped towards minus 20 basis points, very close to the lows of the last decade. That German and many other euro-zone bond yields are at similarly low levels (indeed globally 11 USD trillion worth of bonds trades with negative yields) will encourage many commentators to suggest that Europe is the next Japan. In this respect if bond yields are a forecast of future growth, this is not an optimistic view.

Here, one of the central tenets of The Levelling is that there is too much debt in the global financial system, and that too little is being done about it. Quantitative easing makes this worse by diminishing the urgency which with indebtedness should be tackled and creating the circumstances where economic actors feel that they can take on even more debt. In many cases, Japan being one, debt clogs and distorts the economic system, and until it is paid back or restructured, economic growth in indebted countries (most of the world) will remain sluggish. Its all enough to make me think of Charlie Chaplin’s depression era film Modern Times.

Have a great week ahead,

Mike

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