Italy and Japan appear tied together in a three-legged race. Before long at least one is bound to fall over.
Given all the recent publicity about Japan and the colossal amounts of money it is about to throw at reviving an ailing economy, it seems strange to lump the two countries together.
Different cultures and business practices should make for a very unlikely link, but they are in a similar hole and Japan is leading where Italy could mistakenly follow.
Italy and Japan were once the two largest Axis powers with Germany. After World War II, all three benefited from huge subsidies, mostly from the US and much of it in the form of debt write-offs.
Unencumbered by debts, all three amassed huge savings, almost all through 40 years of manufacturing prowess dating back to the 1950s. Exports of everything from toasters to car parts fueled an astonishing rise in living standards.
From the early 1990s, all three entered a long decline, each weighed down by their own financial problems (the integration of East Germany, the Tokyo property bubble, and Italy’s stagnant productivity).
Falling birth rates added to their woes (caused, arguably in part, by the state’s reliance on women to continue their domestic role without childcare when they entered the workplace).
Germany’s aging postwar baby boomers broke free of the triumvirate. Among other things, they endorsed then-German chancellor Gerhard Schroder’s mix of Anglo-Saxon (reduced wages and reduced job protection) and French-style child support alongside swingeing cuts to the terms and conditions for younger workers.
Rome and Tokyo opted to borrow to protect the living standards of their aging populations, while attacking the wages and conditions of the young. It did not work. Though they still appeared to churn out top-of-the-line manufactured goods, especially in Japan, increasingly it was for assembly by foreign companies.
In Italy, the car manufacturer Fiat is hemorrhaging sales, while Po Valley parts suppliers keep Germany’s BMW fully stocked with brake pads and door panels. Likewise, Japanese electronics firm Sharp has become more dependent on making iPad screens for Apple than TVs or mini hi-fi systems under its own brand name and has become a persistent lossmaker.
Japan’s newest tactic has grabbed the headlines in the last week. Put simply, it will combine a long-standing policy of running budget deficits amounting to 10 percent of GDP a year with a massive US Federal Reserve-style money creation spree. An increase in VAT is supposed to keep a lid on the budget deficit.
Charles Dumas, the eminent boss of economic analysts Lombard Street Research, describes in his latest monthly review how Japan’s refusal to adapt has cost its citizens dearly. Such is the loss of export competitiveness that per capita incomes are now about half that of the US. Deflation, in the form of persistently falling prices, has deterred consumer spending (why spend when prices will be lower in six months or a year) and encouraged savings because even though interest rates are at rock bottom, savings values rise each year relative to prices.
Dumas recommends Tokyo scrap its VAT rise for the time being and instead tax dead money doing nothing. His target is retained corporate profits, which are not invested or disbursed to shareholders. He recommends a punitive or even 100 percent tax, and a low or zero tax on their disbursement to get cash out into the economy. Not the stuff created by the central bank. Real cash.