By Gillian Tett
Published: September 2 2010 17:40 | Last updated: September 2 2010 17:40
Who would want to be in the shoes of Ben
Bernanke, Federal Reserve chairman, or for that matter, in those of
Jean-Claude Trichet, president of the European Central Bank?
They are grappling with a fiendish dilemma. As concern about a double dip grows, there
is rising pressure for more stimulus. But the more addicted western economies
become to aid, the harder it will be to implement exit strategies.
As the policy debate intensifies, investors might spare a thought for Korekiyo
Takahashi, Bank of Japan governor from 1911 to 1913. He also served as finance
minister and prime minister in the 1920s and 1930s.
Outside Japan, few western investors know the name. For while there is discussion about
what can be learnt from Japan’s lost decade, little attention has been paid to
The experience of 1930s Japan is thought-provoking. Not only does it help explain
the decisions that Tokyo leaders took during the lost decade; it offers a
cautionary tale about exit strategies.
In the early years of the last century, Japan boomed after it opened its doors and set about catching up with the industrial might of the west.
But in the 1920’s this came to an end: as global trade slowed, Japan went into a recession
amid bank collapses and a credit crunch that was exacerbated by the country’s
link to the gold standard.
However, in December 1931, Takahashi returned to the job of finance minister.
He was unusual: the illegitimate son of a teenage maid, he studied in the US and rose
through the central bank, displaying a formidable intellect. A Keynsian by
instinct Takahashi reversed the tough, deflationary stance of his predecessor
and fought recession with massive stimulus: he abandoned the gold standard,
loosened credit conditions and raised public spending, financed with new debt.
In some ways, it worked. As the yen lost 40 per cent of its value, exports boomed.
Then, as annual public spending rose above 50 per cent of GDP, or almost double
the 1929 level, Japan’s economy stabilised, even as the US continued to ail.
But Takahashi encountered two problems.
First, the stimulus did not stop Japan from becoming marked by social fracture, political
unrest and nationalism. On the contrary, tensions continued to rise, partly
because the large conglomerates, or zaibatsu, were the biggest winners
Mitsui, for example, made millions of dollars from currency trading as Japan left the
gold standard. That sparked resentment, not unlike what has happened in the US
as Wall Street banks have made profits from quantitative easing.
Second, and unsurprisingly, the spending bonanza undermined confidence in Japan’s government debt and its currency, creating fragility.
So in 1936, Takahashi embarked on an exit strategy, cutting public spending and tightening monetary policy.
From a macroeconomic perspective, it made sense. But it cost Takahashi his life. As
political tensions exploded, he was assassinated by rogue army officers who
were furious at – among other things – the military spending cuts. That
triggered a slide towards militarism, wild public spending and hyperinflation.
Today’s policymakers live in a different world, but Takahashi’s tragedy shows, in an
extreme form, the political perils of exit strategies, particularly when vested
interests are involved and politicians have become addicted to that aid.
It also highlights the great fault line that divides western finance officials now.
Memories of the 1930s still haunt Japanese policymakers, particularly, but not exclusively,
at the Bank of Japan. Little wonder that so many Japanese leaders prize social
cohesion and policy stability so highly, even though this timidity has produced
a decade of stagnation.
Many German leaders have similar instincts, partly because of memories of 1920s
hyperinflation. As a columnist pointed out here on Thursday, this is a reason
that Germany could end up emulating Japan. It also explains
the current tone of the European Central Bank.
But in the US today, it is the lessons from the Great Depression that dominate the debate,
with people such as Mr Bernanke determined to avoid repeating the mistakes of
That is understandable; I, for one, recognise that CTRL + Click to follow link"">stimulus has been necessary. But US
policymakers and investors might do well to heed the Takahashi tale too. It
could offer historical balance and a reminder of how hard exit strategies can
be, even in the absence of political extremism.
Copyright The Financial Times Limited 2010.