Japan: Lost in Translation Part Two

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1:34David McWilliams: How are you doing there? It is again podcast time. You are very welcome. And if you're a new subscriber, a new listener, why don't you go back and listen to a whole host of old ones to give you a feel of what we're all about. and if you are a regular, a regular recidivist, you will know what the podcast is about. We try to make economics, politics, geostrategy, geoeconomics as applicable, comprehensible and I think understandable as we possibly can twice a week. So welcome if you're new and if you're old, lovely to have you. John, we are on the stage of Electric Picnic. We will talk about that.

2:17David McWilliams: We will talk about that. maybe next week or the week after. But this week, I want to pick up on our Japan week. Last time out, we had Russell Jones, former boss of mine, all around great guy, wonderful economist, 40 years at the top of the economics game. His latest book is A Modern Economic History of Japan. We basically talked about the history of Japan economically from the Meiji Restoration, which was around late 1860s, all the way up to 1990. Taking in the First World War, the Second World War, the actual Japanese war against the Russians in 1905, the destruction of the Japanese economy and society in 1945, the dropping of the nuclear bombs on Hiroshima and Nagasaki, all the way up to the economic miracle and the massive, massive boom-bust cycle they had in property lending where their banking system and their property system went out of complete control and ended in a massive, massive crash around 1989 in the early 90s.

3:22David McWilliams: But I know from memory, John, you were in Japan in the early 90s. Yes. Tell me all about that. I've never been there, so tell me all about it. Yeah, yeah, yeah, yeah. I was brought over to do a soundtrack with trumpet player James Macmillan. And we went over. I was really excited to go, actually. and it was December 91, I think it was. And it was... Just when everything was falling apart. Exactly, yeah. It all looked great to me. Don't ever go to a place that John is about to go to because you'll know he's a fantastic leading indicator of chaos. I didn't notice anything. I was in these really glorious studios.

4:00But the funny thing was, it was around Christmas time and we had an interpreter with us. But as we'd go from hotel to studio and studio to hotel, I was noticing every day, we were there for about three weeks, I was noticing every day that there was more and more Christmas decorations around the city, on the streets and in the shops. And every day there was more. And I said to your man, our guy, he was a great guy, I said to him, so, you know, Christmas in Japan, what's it like? What will you do on Christmas Day? And he said, oh, I'll be working. It's a normal working day. But of course. It was just so bizarre.

4:43Well, then why have you got all this? You know, it was that time when Japan were just kind of buying in Western culture and Western trinkets and festivals and stuff.

4:53David McWilliams: Yeah, and aping the West because they were, well, I'll tell you, before we go to Russell talk about Japan, I was in a place in China. I've never been to Japan. I really want to go. Yeah. But I was in a place in China called Ningbo, which is a port city south of Shanghai. And it's one of these places where they've built all these incredible malls and shopping malls and all these sort of things. Yeah. And this is, again, about 20 years ago. So the Chinese are about 15 years ago. The Chinese are just doing that, you know, trinkets for Christmas. But this was for Easter, right? Right. And so it was around Easter.

5:26David McWilliams: So they were all Easter bunnies and these huge shopping malls, right? but they got the whole thing wrong because they had a Christmas tree right around Easter but even better than this do you know it was at the top of the Christmas tree Jesus nailed to the cross

5:43David McWilliams: they got it all wrong I thought you were going to say an Easter bunny no it was like it's meant to be Santa at the top of the Christmas tree it was Jesus on the cross anyway enough of that carry on it's meant to be an angel like no it was Jesus anyway Anyway, this is called Lost in Translation, one of those great movies about living in Japan with Scarlett Johansson and Bill Murray. Did you know I loved it? I loved it. Anyway, Lost in Translation, part two. Let's go back to Russell Jones. We left in 1990 when you and Russell were knocking around Tokyo. The economy was going into a tailspin. They didn't realize that they were going into something profound.

6:28David McWilliams: They thought it would be a short recession. It was a long, long depression. But let's pick up the story. Let's go back to London, talk to Russell. And here we go. We want to go back to the UK We want to go back to Russell Jones We want to pick up the Japanese story We are at 1989 People are unbelievably confident They are hubristic That nothing can stop the country People are buying houses, properties, apartments In Japan, overseas Again, an Irish audience will know Imagine, this is the Galway races, ladies and gentlemen in around 2007. Bertie's doling out the favours. The developers are flying in.

7:11David McWilliams: It's actually like the Cheltenham races. The Cheltenham races, which was actually compared to the opening scene of Apocalypse Now to me, as so many Irish developers arrived in on their helicopters. Do you remember that scene in Apocalypse Now with the helicopters coming in? Well, apparently the Cheltenham races was like that in 2007 as beefed up, overconfident Irish developers and bankers ascended onto the hallowed turf of Cheltenham to blow yet more money in yet another gamble. So Japan is like this, except if the Irish case was big. Japan is on multiple sizes of this. Russell, we're back in the room.

7:48David McWilliams: Great to see you again. Pick it up for us. 1990 or 1989, Japan, you arrive in the country. Yeah, I'm not sure if there's a causal relationship between my arrival and what went on. I like to think not. But, you know, the boom turned to bust very rapidly in 1990. And there had been a recognition for some time within the policymaking community that this couldn't go on. Not least because there was a feeling that it was getting increasingly divisive between the asset haves and the asset have nots. And Japan always considered itself to be a pretty equal society. And there was a fear that was breaking down.

8:28So we had a new central bank governor, a real hard case. Mr. Mieno comes in and he's given the job to deflate the bubble. And boy, did he go about that with gusto. And interest rates were jacked up. I remember they raised rates on Christmas Day, 1989. How about that for really putting one in the eye of the Christian community? The fledgling Christian community of which you were one. I was, yes, yes. if somewhat detached from it. But nevertheless, yeah, so we got a big turnaround in monetary policy and the bubbles started to deflate. And when bubbles start to deflate, they are notoriously difficult to stop.

9:11It's, you know, it's the policy request from hell. And the Bank of Japan, like, you know, many other central banks before it and after it, went on fighting the last battle for too long. So it raised rates by too much. You know, the Iraq war in the early 90s didn't help because that was something of a sort of stagflationary shock to the global economy. But they went on tightening for too long and then they were too slow to cut. At the same time, there was a reluctance to employ fiscal policy. But the most important consideration at that time, I think, was that they did not address the fallout for the financial sector.

9:56The financial sector was devastated by the collapse in asset prices. And the reason for this, and it's a point I'll make, if you want to understand an economy, you have to understand not just the mechanics of its fiscal and monetary policy and so on. You have to understand its history, its culture. You have to understand its politics. You have to understand its anthropology. And in Japanese society, the most important motivating force is shame. and in particular being left out of the group, of the consensus. And, you know, as a Japanese once said to me, you've got to understand, Russell, that in your society, sin is the most important motivator.

10:45But you can be forgiven for your sins. You go to your vicar, you go to your priest, and it's done. But shame lasts forever. and that means the humiliation of what had happened in Japan sort of stopped the appropriate policy response. There was a reluctance to really grasp the nettle, accept the fact that errors have been made, accept the fact that there were massive losses on balance sheets and so on and so forth and the financial sector's issues were not actually addressed for another decade. It was put off and put off and put off. And it meant that you were just left with a sort of running sore.

11:25The economy more or less flatlined. The only growth you got was following these sort of episodic fiscal boosts, which they did ultimately resort to. But there was no sustained fiscal expansion. Growth really collapsed to close to zero, certainly where the private sector was concerned. Meanwhile, inflation after a couple of years just disappeared. And the deflation that the Japanese economy was so subject to over such a long period of time really began at that stage. If you look at the nominal size of the Japanese economy, it peaked in 1995. That's nominal GDP. And it did not exceed that level until the last couple of years.

12:12So in nominal terms, the Japanese economy was about the same size in the early 2020s that it was in 1995. There was no growth over that period. And that gives you an idea of the sort of process of deflation or stagnation that descended upon it. And it was only in 2000 when finally, finally, a really coherent strategy was put in place to deal with the financial sector's problems, to employ a lot of public sector money to the banks, and to start to really look at the details of the losses they'd made and how they had to be made up, and really look at structural change in the banking sector that Japan started to pull out.

13:00and even then its ability to grow was much reduced. By that stage, demographic forces have become much more intense. The population started to shrink in the early 2000s and that's not a good look for any economy. It makes life very hard. So on top of the sort of financial distress and the hangover of the asset price collapse, you then had much more powerful negative demographics kicking in at the beginning of this century.

13:32David McWilliams: So what you have there, I mean, listeners, just again, I'm going to compare it to Ireland. You have exactly the same sort of dynamic, which is the following. You have what is called a balance sheet recession. So basically what happens is, and this is a very tricky, just for the macroeconomists out there, you'll know this, but if you're not a macroeconomist, you'll know that a balance sheet recession is a very, very difficult recession to get out of. And the reason is on the asset side of people's balance sheets and bank's balance sheets, there are a whole load of assets which have fallen in value.

14:05David McWilliams: But on the debt side, the debts you incur to take to buy those assets haven't got any smaller in any material case. So there's an actual disjunction in your balance sheet. And this can go on for years and years and years. In the Irish case, we got lucky for a number of reasons. One is our population was rising rapidly. And two, just after 2008, our American friends and the multinationals came in to give us this extraordinary boost, which allowed the economy to refloat on a different path. Japan didn't have that open to it. So explain to me, I want to go back to one thing you said about the shame, Russell.

14:41David McWilliams: So you live in Japan. When you and I worked together, you were very, very much a xenophile, I think is the expression, the word, somebody who understood and liked Japan. why is there this notion of shame within the society or why is it more prevalent and deeper there than in other societies well it goes back um you know hundreds of years david you know it's it's it's part of of the nation's psyche and it's still there i'll give you i'll give you an example when i when i was writing the book i sent a copy to an old bank of japan contact of mine very very nice man who'd given me a lot of help over the years, was very senior at the bank.

15:26And he was the only guy that pushed back on anything I'd written. Maybe I sent it to the right people. But he pushed back on what I'd said about the Second World War. And in relation to the Second World War, I'd said, you know, some pretty judgmental things about the way Japan had behaved in across Asia, and so on, which, you know, to the Western reader would not have been remotely controversial you know things about the rape of man king and the treatment of prisoner of war that sort of stuff and uh this japanese guy came flying back at me and said oh i think you know perhaps you're you're misjudging some of the things that we did you know i know a lot of people in asia who think that we put in place excellent infrastructure across countries like indonesia and malaysia and so on and it brought home to me this this point about an unwillingness to accept if you like embarrassing facts facts that you know can be will be judged in a negative way and it's all part and parcel of this you know there's an element of shame an element of humiliation and unwillingness to really be quite as honest about things as perhaps we in the West would be.

16:45And I draw the comparison in particular with the US. You know, historically, and I'm not quite sure it applies today, but historically, the US has been the most open and transparent of societies. When they hit a problem, they think, right, we've got to deal with this, we've got to confront it, we've got to get on it, we've got to change what we do. In Japan, when it's a nasty surprise, there is a tendency to put off addressing it or to pretend it's not there or to put the blame on somebody else or whatever. But it's a trait which goes back, you know, it's very deep, goes back hundreds and hundreds of years.

17:25And it's bound up with, you know, with the philosophies and the anthropology of the country and so on.

17:32David McWilliams: It's interesting you say that because we know that in America there is nothing better than to be a failure. If you haven't failed, you're not an American. Do you know what I mean? So if you haven't made a bollocks of things, right, in parentheses, you're not a real person in America. So the actual, the act of failure spurs the Americans on. In actual fact, they have nothing but respect for the comeback king. It's in their sort of psyche. Just listeners, if you're interested in Japan, the Second World War, just as Russell was talking there, an amazing book called The Narrow Road to the Deep North by Richard Flanagan, who is an Australian writer.

18:06David McWilliams: Not even an Australian writer, he's a Tassie writer. He's from Tasmania. And obviously he was named like Flanagan. He's one of ours from years ago. But it's an extraordinary book. And it starts with, you were talking about in the previous episode, The Loss of Singapore, about Anzac troops being taken prisoner by the Japanese military and the psychological impact on that generation of Aussies who came back in the late 1940s and never really got over it. So as you said, it's very much a beautiful novel, but about that period, well worth it. You know, we always, in this podcast, we always do a bit of literature, a bit of history, all that sort of stuff.

18:42David McWilliams: So let's, Russell, let's focus on two issues now. The culmination of the policy of fiscal expansion at a time when your population is falling tends to lead to very large levels of national debt. Okay? Number one. And number two, this leads to American commentators constantly, and I've seen them, particularly those of the libertarian, the right-wing perspective, saying a massive default event in Japan is only a matter of time because they clearly can't pay all their debts. That's two issues. And then the third one is a society that has, over many years, been running a massive trade and current account surplus has to put that money somewhere.

19:24David McWilliams: and the Japanese have lent phenomenal amounts of money to the Americans. So can you answer, like, I want to get us up to today and the trade and the international relations and the tariffs and all that, but the financial position of Japan, is there a default worry there, number one? And number two, why did the Japanese take on so much American debt over the years? Okay, the issue of the public finances is again a pretty complicated one in Japan. You know, the first point to make is that when your economy suddenly can't grow as fast as it used to be able to grow, you don't accumulate as many tax revenues.

20:05So there's a sort of natural tension that builds into your public finances when your economy slows. And Japan certainly suffered from that when it was very weak in the 1990s. At the same time as that, the Japanese did ultimately employ fiscal policy very actively in the 1990s. Now, my personal view is I think that was a good thing. You know, I'm very much a Keynesian. And if the private sector is on the bones of its ass, as it were, the public sector should step in to stabilize things. My criticism of Japanese policymakers in the 1990s was that they didn't do it very well. It was very episodic.

20:47There were sort of bursts of spending rather than it being sustained. It was very inefficiently done. There was a lot of political manipulation of projects, you know, to bring it back to macroeconomics. The multiplier effects of the fiscal stimulus were not very powerful. And so, you know, it didn't have an extended impact. But the cost was this accumulation of budget deficits and this accumulation of government debt. And, you know, ultimately, Japan ended up with a public sector debt ratio of close to 250 % of GDP, which is extraordinary. I mean, it is extraordinary.

21:29David McWilliams: If you think about Ireland, I think about Britain. I mean, Britain's about 100%. Yeah. don't worry about us because our GDP figures are Mickey Mouse. So apparently we've got about 40 % debt GDP, which we don't have to worry about that. But I mean, you know, typical Western countries, you're talking around 100 % and that gets people's knickers in a twist. The Japanese, it's 250%. How do they keep financing this? Explain to me what's going on. Just to add to the point, I mean, it's about where it was at the end of the Second World War, although it's pretty hazy, frankly. It's about where the UK was at the end of the Second World War, 240 % of GDP.

22:06How did they get away with it? Well, first of all, interest rates around the world were very low. And in Japan, they were lower than anywhere else. I mean, for a period, the Japanese government could borrow for 10 years at zero or less. Wow. They have a very, very conservative household sector in Japan, in the sense that, you know, they don't like investing in equities, especially since the debacle of 1989-90. So there's a very high savings rate within the domestic economy, and that helps. They also have had a central bank, which through the mechanism of unorthodox monetary policy, quantitative easing and so on, was accumulating a huge amount of bonds on its balance sheet.

22:55Now, I know this is a bit technical, but quantitative easing is the central bank buying bonds. And for an extended period, the central bank was actually buying more than the annual issuance of Japanese government debt. So let's say the Japanese government issues 10 trillion yen of bonds a year. For some years, a number of years, a run of years, the central bank was taking all those bonds and more onto its balance sheet as part of trying to put money into the economy, to stimulate the economy. So where it's ended up now is about 50 % of all the bonds outstanding are held on the Bank of Japan's balance sheet, which is extraordinary, really is extraordinary.

23:45So, you know, there are a number of reasons how they were getting away with it. My sense is that that factor about what the Bank of Japan is doing, and the fact that interest rates generally were very low around the world are the things that really kept them out of trouble. The consideration which over history nearly always ends in generating a fiscal crisis is when your borrowing costs surge, when suddenly a government finds that it used to be able to borrow at 5 % and now it can only borrow at 10%. That's what triggers a crisis. And Japan hasn't had that yet. It hasn't had that yet.

24:22David McWilliams: And so those Americans who are saying, look, they look at the They look at the debt. And when I say it's Americans, it's usually American hedge funds who then try to sell a story to the market, who then try to basically buy the rumor, sell the facts sort of idea. They're trying to create a scenario. What they're saying is the Japanese debt-GDP ratio is so unsustainable that at some stage the Japanese government will default on its obligations and you will get an Asian crisis style, 1987, 1988, Thai bat sort of Indonesian sort of style crisis. You're saying that's not really in prospect. I don't know.

25:00I mean, it could be. I mean, you could also argue that maybe what the Bank of Japan should do, or the government should do, is just cancel all those bonds on the Bank of Japan's balance sheet. I mean, after all, it's just a transaction within the public sector. But anyway, I mean, the connotations of that are many and various, and we probably don't want to go down that rabbit hole. But here's some interesting stats for you in answer to your American pals. Yes, the cost of servicing Japan's debt is starting to rise. And a few years ago, it was essentially the cost of servicing that debt amounted to barely more than 0 % of GDP.

25:40Interest rates were so low. The cost of servicing the debt today is about half a percent of GDP. So it's risen. Yeah, but still very, very low. Now, let me put that into context. In the US, the cost of servicing its debt at the moment is 4 % of GDP and rising. The average cost of debt within the OECD nations is about 2.5 % and rising. So Japan is starting to experience problems, but actually, it's the sort of necessity for adjustment through that interest rate mechanism, that cost of borrowing mechanism, is arguably considerably less of a problem than it is in the United States.

26:26David McWilliams: Well, you mean you've just put out the Americans of an eight times more acute problem, frankly, than the Japanese. So maybe they should get back in their box. You know, what is very clear as well, as you yourself hinted, is that the Japanese have been funding a lot of the US government for many, many years. And they've accumulated a lot of US treasury bonds. You asked why they did that. Well, it's because treasury bonds are the most liquid, safe asset you can have, or certainly have been until now when we have this joker in the White House who's destroying all the institutions and all the trust across the international economy.

27:05But, you know, that's the real reason why Japan has accumulated all this debt. It's something you could depend on. It was safe. It was liquid. they bought a lot of other stuff as well, not just US Treasury bonds, but they have accumulated those bonds for that very reason.

27:23David McWilliams: Can I just, the reason I ask this is because about two months ago when the US Treasury market sold off dramatically, there was lots and lots of rumors that the Japanese, as an anti-tariff move, talking about the same people who actually invaded Pearl Harbor now, right? So there's a strategic gambling instinct in these people, okay? Yeah. That they said to the Yanks, Look, you know, you're going to come hard at us, but we have this thing called we own your debt. Could the Japanese or would the Japanese or can you see a situation where Trump so inflames them that they begin to offload that massive, massive amount of American debt that they own, precipitating a bond crisis in the United States?

28:04David McWilliams: So my point is that they're not without weapons in the context of a tariff war. no i mean i i don't think i'll go down that route and the japanese are have been thrown into total disarray by by what's happening with trump well certainly trump too in actual fact shinzo abe the prime minister but one or two now i get i lose count of japanese prime ministers he had a very relationship with Trump. And the Japanese were very grateful for that. Because, you know, the rise of China has put the fear of God into Japan. Because China is a massive economy, it's right next door. You know, the history between the two countries is really not a good one.

28:52And the Chinese have never forgiven the Japanese for the Second World War, and are unlikely to any time suit. So the Japanese have, since the rise of China in the 1980s, been scared to death by it. I remember going to see people in the Japanese foreign ministry in the early 90s, and they were saying, you know, God, if China really continues its economic renaissance, it's going to put us in a very difficult position. So you've got China on one side, and then suddenly, the US, which has been Japan's protector, it's given them this security umbrella since 1945, is starting to take a very different line in trade.

29:34Japan's in an awfully difficult situation. But would they press that button and sell treasuries? And you've also got to remember that those treasuries are held predominantly by private sector entities, not by the Japanese government. Although the Japanese government can exert quite a lot of pressure on some of those private sector entities to buy or sell and have done in the past. But it would be, you know, boy, that's, I hesitate to use the phrase, it would be something of a nuclear option for the Japanese government to go down that route. But they are really knocked off kilter by what's going on at the moment.

30:16Really knocked off kilter.

30:18David McWilliams: So let's end this discussion on that knocked off kilter. So what we're looking at, is two things I want to run a chip. One is, is China going the way of Japan? And by that I mean you have 40 years of extraordinary growth. The Japanese started in 1945. Let's say the Chinese started in 1990, like 1985. Yeah. By 1990, the Japanese were in a massive monetary policy experiment boom-bust cycle. Is China doing the same thing? So China has this 40 years exporting. It accumulates lots and lots of capital. Now it has a massive banking problem. It has a massive housing problem. Is there a sort of an inevitability that China will follow the Japanese path and will spend some years trying to deal with the fallout of what is now a banking crisis in China?

31:09David McWilliams: That's number one. But number two, against the background of geopolitics, is where I actually want to end the podcast. We have Taiwan. We have China. If you look at Japan, you know, Japan is like a spine going down all the way down around China, all the way to Taiwan, and down into the South China Sea. The Americans are still very much supporting them. Where is the geopolitics of that region going? Because what happens there will have a massive impact on everywhere else in the world. I think there are a lot of similarities with Japan and China. And, you know, the demographics are one of them. I mean, the population is going to decline quite rapidly in China because of the one-child policy.

31:53And also, you've had this emphasis on capital accumulation and investment to drive growth, very similar to Japan. I'm just going to read out the demographic statistics in Japan, which this is truly extraordinary. So the population in 2010 was 128 million. Last year, it was 124 million. In 2050, it will be 105 million. In 2070, it will be 87 million. So Japan is confronted by a one-third fall in its population. Now that's, wow, unprecedented in a peacetime economy. Never happened before. How the hell does that play out? I don't know. The IMF has suggested a couple of years ago that the level of Japanese GDP is going to fall by 25 % over the next few decades.

32:47That's extraordinary. But you could argue that China is going to follow a very similar pattern. You could also see similar things playing out in South Korea, for that matter. And there's a couple of European economies, not least Italy and Germany, where it's not a hell of a long way away from it. So demographics are going to become a major a factor in how economies play out over the next decade. And China is definitely at risk from suffering a very similar sort of demographic profile to Japan. And it has a lot of other similarities with what happened to Japan during its boom and bust years. So yeah, I think you have to be really worried about that.

33:31You know, maybe technology gets us out of this. You know, the AI people seem to think it will. Personally, AI just scares the bejesus out of me. But, you know, I'm just an old man these days. The broader geopolitical position in Asia, incredibly uncertain, not least because I don't think we know what Trump's going to do from one day to the next. You know, where his sympathies will lie, you know, will he continue to see China as public enemy number one or not? You know, he seems to have really given Taiwan a hard time over recent weeks, refusing to see people in the US and so on. You know, I really struggle to know what's going to happen in that region.

34:19Japan is really in a terrible place. I mean, you do wonder what they can do.

34:25David McWilliams: You're very negative towards the end because you're saying this demographically, it's all over the shop. It's probably in the wrong part of the world where it might have been the right part of the world for the last 50 years. And what you have is two massive powers having to go at each other and Japan is stuck in the middle really between China and America. Yeah, yeah, yeah. And the other thing is, I mean, I wrote at the very end of my book in the conclusion that, and thankfully so far, the Japanese political system has not, you know, descended into the sort of populism that we associate with the West at the moment.

34:59And lo and behold, for the last couple of months, the Japanese political system seems to have suddenly decided it's going to be adopting some of the similar sort of populist tropes to the rest of us. And that, you know, really scares me. And, you know, it's interesting. The right wing populism in Japan has never really gone away. It's been under the surface. and it suddenly seems to have erupted again. You know, Abe was a very right-wing nationalist. Abe's grandfather, okay, who was Prime Minister of Japan 1957 to 1960, was a war criminal. He had run the Manchurian economy for the Japanese in the late 1930s and was a member of Tojo's War Cabinet.

35:51And he went on, you know, there has been... That's fine pedigree, fine pedigree. Fine pedigree. You have an undercurrent of populism, right-wing populism, but they kept the lid on it. The LVP sort of allowed it to come out in certain directions, but they essentially kept the lid on it. But there is a sense now that that right-wing populism is starting to emerge. And, you know, there's some pretty unpleasant people who are coming to the surface in Japanese politics again. So that's another thing to chuck into the cocktail, which is troubling to say the least.

36:28David McWilliams: On that sobering note, at least you mentioned cocktails, so we can have some sort of upside. Now, Russell, wonderful, a tour de force around history, economics, sociology, finance, a little bit of anthropology, shame, which Catholics know all about. But luckily we have shame, but we have confession, which is even better. You see, we do the shame thing, but we've got absolution as well. Well, no, Russ, that was wonderful. Great to see you again. Again, listeners, the book is A Modern Economic History of Japan by my old boss, Russell Jones. And we would love to have you back in the pod at some stage, Russell.

37:07David McWilliams: Great stuff. Thank you, David. A pleasure.

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39:45that was fascinating stuff wasn't it i mean the way it's laid out over the two episodes you know the first 40 years on the up and the second 40 years are on the down yeah absolutely but what a nice boss to have as well he seems god love me he was a really an absolutely sweetheart very as

40:04David McWilliams: you can hear from the discussion, very clever, very methodical, incredibly well-read, and an all-round decent skin in an industry, believe me, like investment, banking, trade, trading floors, you know, where you don't get that many. There's a lot of sociopaths and psychos in that world. So he wasn't one of the ones that fired you then, no? No, he's the one who hired me. But then he left, then he left, then he left me to fight all the sociopaths. It's like one of those Japanese, what do they call those cartoon things Was it Japanese love? Yeah, manga. It was like a manga story, me fighting all these horrible sociopaths all the time.

40:40David McWilliams: But fascinating stuff there on Japan. And it was great to have him. And it's lovely on the podcast to just sometimes just switch lane completely. Absolutely. Well, let me ask you one last question on this. He was speaking at the end about the kind of geopolitics of the area. But there's a lot of talk, or there has been some talk now about China prepping to invade Taiwan. I mean, that's their stated goal from day one. Seems like a pretty good time since the world is distracted with Ukraine and Russia and Israel and Gaza and the whole shebang. If they do invade, what will that do to Japan, but the region as a whole?

41:25David McWilliams: Well, I think it's interesting what Russell was saying, was that in the last few months, there has been the re-emergence of Japanese nationalism as part of the political ingredients going into Japanese politics. Japanese nationalism is, in parentheses, anti-Chinese. That's what it is. And of course, so it's not coming out of nowhere. It's coming out of a fear, A, that their major backer, America, might abandon them. and B, that the Chinese would like to exert revenge, as Russia would say, you know, the rape of Nanking, Manchuria, all those horrendous things that happened in the 1930s in mainland China, perpetrated by the forces of Imperial Japan.

42:13David McWilliams: And of course, the people who suffered most of that were the Koreans had an awful experience under Imperial Japan. Yeah, Korea won't be in a rush to help Japan. No, no, no, no. But again, the idea would be that since 1945, the world in that part of Asia has been very much an American alliance from Taiwan, the islands south of Japan, Japan itself, and of course, Korea are in the American sphere of influence. If that were to change, then I would suspect that that region will go from a zone of stability, production from exports to a zone of profound instability. The interesting thing is, and we leave it here, is old countries don't fight wars.

43:06So there's one thing because they don't have young people.

43:10David McWilliams: So young people fight wars, right? So a country that's getting very, very old might have a nationalistic bent or a nationalistic bias. But as a typical rule, you need young fellas to fight wars. You need armies, right? Both China and Japan are getting very, very old. It is inconceivable that a clever Chinese leader will do anything immediate in Taiwan to totally upset the progress of China over the last 40 years. I think that it's much more likely that they keep putting on the pressure, taking off the pressure, using Chinese nationalism to deflect from criticism at home. Taiwan is much more valuable to China as an enemy than as a region.

44:06David McWilliams: That's what I would say. because they play Taiwan as a proxy for the West and they can continuously appeal to their own domestic audience in a nationalistic way. But also, the way I look at it is, Taiwan is the hostage in the negotiation with America. If you take the hostage, the negotiation's over. If you keep the hostage and you threaten the hostage, but the hostage is still part of your world, then I think you get more movement on negotiation. So I would say Taiwan, ironically, as an enemy of China is of more consequence and more benefit to China than as a region of China. So we leave it there.

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