May 2023 Monthly:
Lights and shadows of the G7 Hiroshima Summit during the Booming Bubble of the Bank of Japan
May 25, 2023
The G7 Hiroshima Summit ended on the 21st, and Ukrainian President Volodymyr Zelensky participated in face-to-face discussions on the final day of the meeting, which was being invaded by Russia. The Nikkei article published the next day was right on target, stating, "It is unusual for a president of a wartime European country to visit as far away as Asia."
At the G7 Hiroshima Summit, considerable progress was made in terms of diplomacy and security, including moves to prevent nuclear war, countermeasures against Putin's Russia's continuation of the war against Ukraine, and Japan-South Korea diplomacy in East Asia.
The summit appears to have been largely successful. The G7 is the only international framework that respects freedom, democracy and market capitalism, and there is no doubt that its importance has never been higher. I am not at all hesitant in acknowledging the legitimacy of Kishida's diplomatic reputation.
However, the seemingly glamorous success of the G7 Hiroshima Summit in terms of diplomacy and security seems to be hiding a darker side, the lack or failure of international policy coordination in the political and economic fields. Are these concerns and criticisms unjustified?
Therefore, in the following, in the May monthly, as the April monthly "Bank of Japan bubble uncontrollable!" I would like to approach the truth about the light and shadow of the G7 Hiroshima Summit, which is even regarded as a great success. At the end of the report, there is an appendix describing the history of the glories and setbacks of the G7 over half a century.
Discomfort in the "Global South"
By the way, at the G7 Hiroshima Summit this time, there seems to be no evidence that it was included in the statement, but for some reason the new word "global south" was repeatedly emphasized, especially in Japan's media. It looked like this, but frankly speaking, I couldn't help but feel a little uncomfortable.
Around 2008, when the G20 first appeared, a new buzzword called BRICs, an acronym for a series of emerging countries such as Brazil, Russia, India, and China, began to stand out. Although popularized, the term now seems to be on the decline. In addition, there have been a number of recent cases where the G20, which includes the BRICs, has not been able to put together a final agreement. Why?
Needless to say, this is largely a reflection of the growing feud between the United States and Russia and China. However, even if political and economic systems that can be seen as predatory and even tyrannical are temporarily gaining predominance around the world, especially in developing countries, new ideas such as those suggested by the new term “global South” may emerge.
Is it really possible to develop the world peacefully and sustainably through ideas? The so-called advanced Western nations, represented by the G7, which adhere to a inclusive and democratic political and economic system, although not necessarily in the majority today, respect basic human rights and promote freedom, democracy, and market capitalism. Without leading the world by constantly strengthening, evolving, and developing, can we really expect a bright global future?
Is the G7 complicit in Putin's invasion of Ukraine?
By the way, behind Putin's invasion of Ukraine in February 2022, there was a sense of impatience that Russia was lagging far behind Europe and the United States in the race to develop a vaccine against the coronavirus epidemic that had spread all over the world since 2020. There may have been long before the invasion of Ukraine, there appeared to be deep-rooted distrust in the efficacy of the Russian-developed coronavirus vaccine, and Putin's domestic popularity began to take a serious hit. For this reason, by launching a foreign war with the aim of boosting national prestige, by shifting responsibility for domestic problems to external problems in the form of international disputes, politicians are trying to regain domestic political support.
However, if that is the case, China under Xi Jinping's Communist Party dictatorship should be the same. Why did Putin, not Xi Jinping, go to war with neighboring Ukraine?
According to Professor Lebault, an authority on war studies at the University of Cambridge, there are three factors that motivate war: prestige, appetite, and fear. If so, it is possible to see Putin's invasion of Ukraine and subsequent continuation of the war as being caused by the G7. This is because, since 2008, the G7 major central banks have artificially pushed down long-term interest rates significantly through large-scale purchases of mainly government bonds. The resource bubble of soaring crude oil and natural gas prices, which had been born seemingly from the heaven, had greatly expanded Russia's national treasury until the time it invaded Ukraine, and had abundantly enriched Putin's military funds. Against the background of such a rapid expansion of the resource bubble money, Putin fell into the overconfidence and dissonance of recognition peculiar to the bubble mentality, and on the other hand, by stimulating Putin's greed and prestige, the forgiveness of the invasion of Ukraine became apparent. It's possible that it caused a terrible war. The consequences of the G7 becoming, even indirectly, a de facto accomplice in Putin's aggression against Ukraine are indeed serious.
Three Time Bombs Missed by Hiroshima G7 Summit
As detailed in the appendix at the end of the May monthly newsletter, when looking back on the long history of about half a century since the birth of the G7, the main agenda of the summit this time was so inclined to the atomic bombing of Hiroshima and aid to Ukraine that it was difficult to save the corona disaster. The recent high inflation, cost of living crisis, and resource and asset bubble problem can be seen as a disaster due to the excessively radical monetary and fiscal policies of the G7 authorities. The future of the G7, which has fallen silent in the past, is filled with domestic political and economic problems, and it must be said that there is a lot of trouble ahead.
For example, first, there is persistently high global inflation. Currently, with the exception of the Fed in the US, the nominal policy rates of the ECB in the Eurozone and the Bank of England in the UK are still well below the latest inflation rate and inflation expectations one year ahead. With the real policy interest rate, which is the nominal policy interest rate minus the inflation rate, remaining in negative territory and the nominal policy interest rate remaining at an excessively low level that is too stimulating, it is highly unlikely that the inflation rate will continue to decline or dis-inflate.
With inflation still at a high level, it is inevitable that the COST OF LIVING CRISIS seen in Europe will continue for the time being. It would be ill-advised to underestimate the political cost of radicalizing public protest or demonstrations. In addition, especially for the European central banks, which must be viewed as directly confronting Putin and Russia, the continuation of such a contradictory super-accommodative monetary policy would become more problematic.
At the same time as allowing the real estate bubble to swell again like the simultaneous real estate bubble in Europe and the United States around 2008, we must not forget to prolong the global commodity and resource bubble could end up continuing to enrich Putin's war chests. As will be discussed later, the crisis of soaring living costs is becoming a major problem not only in Europe and the United States, but also in Japan. Just announced last night, food prices in the UK soared by 19% year-on-year in April of this year, and the rate of increase in food prices across Japan in the same month was also recorded at 9%.
Second, although the US debt ceiling issue is often ridiculed as being semi-regular, there may be no guarantee that it will be the same this time. This is because the scale of fiscal support to respond to the coronavirus crisis, which has ballooned to about four times the size of the financial support immediately after the Lehman shock, was clearly too large and unsustainable. Thus, the 2023 debt ceiling negotiations to return to a normal fiscal scale will be extremely tough.
In the run-up to the US presidential election next fall (with a total replacement of the House of Representatives and a one-third replacement of the Senate), the current state of the U.S. Congress is likely to become unavoidably partisan and a compromise between the Democratic and the Republican Parties will be hard to be achieved. Although it is President Biden who defeated the heretical incumbent Trump and defended democracy in the United States, there is no doubt that the result of the last presidential election ended in a surprisingly narrow margin. Few readers have forgotten the story that led to the nightmare attack on the US Congress by a mob believed to be on the far right of the Republican Party.
Regardless of its sustainability, the former President Trump is still the leading candidate for the Republican Party's presidential election next year. It is said that Trump himself strongly supports House Republican Speaker McCarthy, who advocates stricter conditions for the generous public spending and food aids. Above all, the Republican Party clearly has a point in claiming that ``the Biden administration's large-scale fiscal spending has led to inflation,'' so it cannot be said that there will not be a big upheaval in the 2023 US debt ceiling issue.
Despite the twists and turns, by Day X, which is currently seen as June 1, being later extended to 5th of the same month, the default of the US Treasuries, which could actually destroy the dollar reserve currency system itself, will be at stake. At the end of the chicken-game, it is said to be avoidable by most of market participants, however.
In any case, there is nothing inherently wrong with the opposition party’s stance of trying to curb a limitless expansion of expenditures by setting a debt ceiling.
The VIX (volatility) index, which is listed and actively traded on the Chicago futures market, which is also called a fear index in the international financial market, has shown a considerable downward trend since March 2023, and as a result, the US stock market has been uptrend in general. It is worrisome that the international financial markets seem to be overly complacent just before the X-day of the government bond default risk. In any case, clearly it seems to be difficult to predict the final resolution of the US Treasury bond default issue, and that we should not let our guard down.
Third, the greatest risk for the G7 may exist in Japan itself. She is the only member of the G7 that is ignorant of its sizes of her debts relative to its GDP and has endlessly accumulated both government and BOJ debts. Centering on the negative policy interest rate and the YCC (yield curve control) as a t pegging mechanism of the long-term interest rates, Japan's strangeness that has not yet ended the currency depreciation competition and currency war that has become conspicuous especially since 2014 is outstanding. Needless to say, Japan is the only member of the G7 that has yet to move toward normalizing the current negative policy interest rates and unconventional monetary ultra-easing, even though inflation is already clearly running beyond 2% inflation target.
Boiling bubble of the Bank of Japan due to "cognitive resonance”
Japan's rapid acceleration of inflation is already clear, and the policy of impoverishing neighbors aimed at depreciating the currency has already changed into a policy of impoverishing the country itself, and sooner or later, Japan itself could invite the greatest crisis since the end of the war. For example, according to the April national CPI statistics just released last weekend, the core-core CPI (which can be called the underlying price level, not just for the G7 but for the rest of the world), excluding fresh food and energy, was recorded 4.1% year on year. The inflation rate has already risen by more than +0.4% month-on-month (simple annual rate +4.8%) for four consecutive months since January this year.
Even after the results of the statistics, however, the new governor of the Bank of Japan, Ueda, stated, "A hasty policy change would have a huge cost to nipping the buds of achieving the 2% inflation target." The governor has been fallen into cognitive resonance and as a result the BOJ’s inflating bubble has already become uncontrollable, not only in terms of prices (inflation) but also in terms of asset bubbles such as foreign exchange and stocks. The dollar-yen exchange rate rose sharply in mid-to-late May, and the Nikkei 225 stock index seems to be boiling at its highest level since the collapse of the bubble economy.
Glory of G7 once again!
With the external (current account) surplus shrinking considerably and the twin debts of the unprecedented levels of government and the Bank of Japan only accumulating, Japan will sooner or later be highly likely to face the greatest economic crisis since the end of World War II. She could be forced into a situation where it will not be able to attend at the next G7 meeting expected to be held in Italy next year due to the domestic crisis.
In any case, there is only a year and a half left until the 2025 problem, at which all post-war baby boomers will reach at the late stage of being elderly, when social security costs will peak. Will Japan be able to remain a member of the G7 developed nations five years from now?
In any case, the G7 will only sustain a relationship of coexistence and co-prosperity if each of the major developed countries maintains, strengthens and develops an inclusive and democratic political and economic system through self-respect for freedom, democracy and market capitalism. As for monetary policy, unlike fiscal policy, it can be independence of domestic politics. Thus, the G7 can and should change from the conventional discretionary principle to a rule-based one.
Shouldn't we aim at avoiding competitive devaluation or currency wars and at the same time controlling the ever magnifying cycles of expansion and collapse of asset bubbles and commodity bubbles?
G7 and Japan's Revival Scenario
In any case, Japan should not go back to the prewar rich country strong army policy, which ended in a crushing defeat in the last war. Only by laying a solid foundation for the revival of the Japanese economy can we ensure the security of our country. And the cornerstone of the wealthy county wealth policy, lies a permanent reduction of the consumption tax rate to 5% and measured normalization of monetary policy away from the negative policy interest rate and the long-term interest rate pegging policy (YCC), which is nothing but the optimal fiscal and monetary policy mix for the Japanese economy. It is with great regret that Japan's political and economic system appears to be nothing more than the exploitation of the general public by the "upper class citizens" with heredity and privileges, who tend to neglect freedom and democracy, lean toward state capitalism rather than market capitalism. Regrettably, it is undeniable to say Japan stands out among the G7 as an outlier, who is likely to be most vulnerable to any political and economic risks ahead.
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