From Athens to Tokyo

THE summer of 2015 has seen developments between Greece and its creditors overshadow almost anything else going on in financial markets. The double digit correction in China A-shares contrasting against the resilience of the yuan or the timing of the US interest rate hike would perhaps normally command more attention. At the heart of the Greece discord are profound choices that ultimately determine the path that the economy will take over the longer term.

Japan is another country that has faced the need to make profound choices over its future well-being. Like Greece, Japan has a very high level of debt. But Japan's challenge is predominantly about how to wrestle the economy free of deflation, which has been a persistent feature over the past two decades. To do so, it has the full freedom of fiscal and monetary policy adjustments, as well as an ambitious catalogue of economic and financial reforms, spearheaded by Prime Minister Shinzo Abe, who has honed in on the longer term ill effects of falling prices.

Yet it should be seen that with an ageing and shrinking population, deflation was a boon to those who had accumulated savings, as the real rate of return on low risk government bonds (JGBs) protected their purchasing power. However, for working age Japanese or those without a stockpile of JGB's, deflation has been a major drag on their ability to earn higher wages. What this implies is that the policy package to reverse deflation, collectively now well known as Abenomics, is also about a transfer of purchasing power from one segment of the population to another.