John Vail is Nikko Asset Management’s head of global macro strategy and asset allocation and also chairs the group’s global investment committee. Before joining Nikko AM in 2006, he was chief Japanese equity strategist for JPMorgan Securities Japan from 2004 and chief strategist at Mizuho Securities USA from 2000. He also held various senior research and strategy positions at Fidelity from 1985 to 1992, based in Hong Kong, Taiwan, and Japan, and covered pan-Asia equities at his own firm, Asia House Funds, for five years from 1993. Vail holds a BA from the University of Chicago.
Many commentators have warned that advanced economies, particularly in Europe, could be in for a protracted period of near-zero growth, with clear parallels with Japan’s “lost two decades.” As a fund strategist with deep experience of Japan, what is your view?
The first thing I would point out is that Japan is a very different place, culturally and at the level of people’s attitudes and expectations, than anything you will find in Europe or the United States. So the differences between the West and Japan are at least as important as any similarities in their economic positions. Japan’s differences have been both a strength and a burden in the way that they have dealt with their crisis over the last 20 years. The Japanese were very slow to recognize the depth of their crisis and slow to react to it, but throughout the people—the general public—have maintained discipline and have been very cautious in the way they deal with their household budgets. To find anything like the same level of thrift in the West you would have to go back to the 1930s and the Great Depression, when everyone was deeply concerned about the future and was counting their pennies.
However, that is certainly not the general way in the United States. There is a good deal of optimism there. Certainly there is some stress in the national psyche in the United States today, but Americans do not react in the same way as the Japanese. Of course, one of the reasons why the policy response by the Japanese has been so conservative is that the country is trapped by its huge deficit, currently around 200% of GDP. If the economy ever got too strong, or inflation rose above 2%, their interest payments would rise sharply and this would aggravate the deficit more than economic growth would help it. That is the crux of Japan’s dilemma and explains much about how the Japanese government and the Bank of Japan (Japan’s central bank) have conducted economic and monetary policy.