Geopolitics and Markets Review – 31st July 2023

Japan’s Economic Miracle, Collapse, and Back Again? Will China Experience The Same Fate?

This week, a key story was Japan limiting its control on the bond market by allowing the 10Y government bond to rise to 1%, from its 0.5% cap prior. This story prompted me to explore the financial and geopolitical history of how we arrived at this point today. After the story, I’ll explore what we learnt and the mistakes we should avoid in the future.

Also this week marks the beginning of my Marine and Aviation Weekly Developments section. You can access this with a free trial of the Geopolitics Explained premium content membership below!

The 25% off for life offer still remains on my premium content. To redeem the offer, access here:

---

What’s Happening In Japanese Bond Markets?

The Bank of Japan governor Kazuo Ueda made the decision to widen the range in which 10-year Japanese bonds can move, raising to 1% from 0.5%.

Japan has been performing yield curve control since 2016 when it changed from a policy of quantitative easing to maintaining the bond yield of the ten-year government bond at 0%. They did this by buying or selling in the bond market as required to hold the yield at 0%. If bonds are heavily bought, yields drop because bond prices and bond yields move inverted to each other.

What led Japan to yield curve control in the first place? Let’s study some financial history.

---

Japan’s Economic Miracle, Collapse, and Back Again?

The Japanese economic miracle is how we find ourselves here today. Post-World War Two, Japan had lost the war, and two of its cities, Hiroshima, and Nagasaki, were victims of the only use of nuclear weapons on another state in history. The impact of Japan adopting a war economy in a war it hadn’t won was yet to be seen. The war wiped out all the gains Japan had made since 1868. Over 70 years of growth, vanished.

Things sound rather bleak from this point of view. So regardless of all this, how did Japan manage to grow into the third biggest economy in the world behind the US and the Soviet Union by the 1960s?

---

Japanese Post-WW2 – The Recovery (1946 – 1954)

War economies typically contribute to inflation. In Japan’s case, it certainly did.

The currency had been hugely devalued.

The country was littered with shortages.

How were these problems solved?

The Dodge Plan was created to seek solutions to high Japanese inflation, so named as it was drafted by American economist Joseph Dodge. His strategies also paved the way for Japanese economic independence.

The steps of this plan were as follows:

1) Balancing the national budget to reduce inflation.

2) More efficient tax collection.

3) Dissolving the Reconstruction Finance Bank

4) Decreasing the scope of government intervention.

5) Fixing the exchange rate to 360 yen to one USD, so Japanese exports were cheap.

To further contribute to their problems, Japanese industry was on its knees, and famine was on the horizon. But learning from their mistakes at the end of World War One, the countries that suffered the most damage from the war weren’t ignored and were left to fend for themselves. Japan, West Germany, and Italy experienced the most rapid industrial recoveries due to support from other nations, led by the United States. The reason the United States sought to support these states is debated to have been a play to limit the Soviet Union's power and influence, especially in Asia in the case of Japan. So much so, that the United States continued to occupy Japan until 1952, providing $1.9B in support, equivalent to 15% of Japanese imports during the period. By this time, the Japanese economy was a part of the global economy, a relationship with the United States had emerged that hasn’t faded since, and the stage was set for rapid industrialisation and the Japanese economic miracle.