TODAY is a very special day for Gulliver, for it is ten years to the very day since his column at The Economist opened for business. Since then, much has changed in the world of travel. A barrel of oil is now worth a tad over $60, instead of around the $100 mark as in April 2008. Old friends such as Monarch Airlines of Britain, Continental, NorthWest and US Airways of America and Air Berlin of Germany have long been consigned to the dustbin of history due to bankruptcies and mergers. Airbus’s A380 superjumbo, the largest passenger airliner ever built, somehow managed to go from the future of aviation to its past in less than a decade.
But 2,911 posts since Gulliver started to blog for The Economist (after he had escaped from the tiny Lilliputian people that had imprisoned him), some things in the travel world have not changed. Looking back at Gulliver’s first ever post, the recurrent theme of many recent ones—namely the absurdies of poorly thought out business practices, often accompanied by ill-judged government regulations—was clearly there at the start:
AT A time when the price of a barrel of oil hovers around the $100 mark and airfares look set to rise, some lucky European travellers have been able to leave their wallets untouched. Flybe, a British budget carrier, recently gave away 200 return tickets on certain services between Norwich in Britain and Dublin in Ireland. It even offered to pay actors to come on board to boost the passenger roll. The rationale? To earn a £280,000 rebate from Norwich airport, the airline needed to fly 15,000 passengers on the Norwich-Dublin route in the 12 months to March 31st. Finding itself a few passengers short as the deadline approached, Flybe took drastic action. It blamed the airport’s intransigence for such absurdity. The airport said Flybe’s actions were not in the “spirit” of the agreement.
The best of Gulliver from the last few years:
2. Countries’ favourite beers: the lager picture (March 2015)
3. Walk right in: When it comes to passports, it pays to be German (March 2016)
4. Frequent flyers: The sad, sick life of the business traveller (August 2015)
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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