Raphael Stevens

When moody’s, a research firm, cut Japan’s top-grade credit rating and warned of a “significant deterioration in the government’s fiscal position”, Nintendo’s first colour Game Boy was taking the world by storm and Japan’s net government debt ran to 54% of GDP. Twenty-five years later that figure stands at 159%. The growth has been cushioned by a fall in government bond yields, which means that Japan paid less interest to its creditors last year than it did three decades ago. But now Moody’s warning may finally come true.That is because refinancing is becoming more expensive. Ten-year government bond yields have risen from, in effect, zero three years ago to around 0.7% now. A rise in inflation has forced the Bank of Japan (boj) to all but abandon its policy of capping long-term bond yields. The next step may be to raise short-term interest rates for the first time since 2007. Central banks elsewhere are considering cutting rates; Japan is moving in the opposite direction.image: The EconomistPoliticians seem not to have realised. Kishida Fumio, Japan’s prime minister, plans to splurge. Defence spending is set to double as a share of gdp by 2027. As the population ages, welfare payments will grow. On November 29th parliament voted in favour of temporary tax cuts worth 1% of Japan’s gdp. The decision drew a rebuke from Shirakawa Masaaki, a former boj governor, who questioned the logic of cutting taxes when the country faces inflation.Japan’s finance ministry predicts that interest payments to bondholders will rise from ¥7.3trn ($54bn) in the last fiscal year to ¥8.5trn in the current one, the largest nominal increase since 1983. This is just the start, since payments go up only when bonds are refinanced. In 2024 ¥119trn in bonds will mature. Another ¥158trn will then mature over 2025 and 2026.The scale of the threat to Japan’s public finances depends on economic growth. Goldman Sachs, a bank, calculates that, with nominal growth of 2%, Japan’s persistent budget deficit will be sustainable if average interest rates on its debts stay at 1.1% or below. Since average interest rates were nearly 0.8% in the year to March, that leaves a modest buffer. A little additional growth would go a long way. With nominal growth of 3%, Goldman’s analysts think that interest rates could rise as high as 2.1% without threatening the public finances.Even if the public finances are not imperilled, the bill from greater interest payments will mount, putting policymakers under pressure. After a decade of bond-buying, the boj owns almost half the country’s government debt. To finance the bond purchases, it created a huge volume of central-bank reserves—a sort of deposit owed to the commercial banks that sold the bonds to the boj in the first place. These reserves have floating interest rates.When short-term rates were zero, this was hardly a problem. From April to September, the boj earned ¥807bn in interest on its holdings of government bonds, and paid out ¥92bn on its deposits. But if the boj were to pay even half a percentage point in total interest on its reserves, outgoings would run to ¥2.7trn, an amount equivalent to 40% of the defence budget.How should politicians respond? If the government slashes spending when monetary policy is tightening, it could ruin another opportunity for economic recovery. For now, ministers are more concerned with stimulating growth—as shown by Mr Kishida’s tax cuts. In time, though, rising interest payments may force their hand. Without the cushion of low interest rates, long-discussed risks to Japan’s finances will become uncomfortably real. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

It is hard to overstate the impact of America’s fentanyl epidemic. The synthetic opioid and its close chemical relatives were involved in about 70% of the country’s 110,000 overdose deaths in 2022. They are now almost certainly the biggest killer of Americans between the ages of 18 and 49. Every 14 months or so America loses more people to fentanyl than it has lost in all of its wars combined since the second world war, from Korea to Afghanistan.Perhaps it seems odd to look to economics for insights about how to manage a crisis which is more naturally the domain of public health, but economists’ research methods are well-suited to examining the problem. It is thus regrettable that the discipline has had little to say about fentanyl. A review of 150 economic studies in 2022 included just two that were focused on the drug.Such inattention can be explained by the research time lag. From identifying questions to writing up findings to—most painful of all—peer review, it can easily take a decade to go from inchoate idea to published paper. Given that fentanyl overtook heroin as the biggest drug killer in America in 2016, economic research on its spread is only just beginning to arrive.This delay has led to a backward-looking bias in discussions of the crisis. Research has concentrated on earlier waves of America’s opioid addictions, notably prescription pills in the early 2000s and the shift to heroin and other alternatives in the 2010s.The best-known explanation is the “deaths of despair” hypothesis, advanced by Anne Case and Angus Deaton of Princeton University. They examined a sharp rise in mortality for white Americans, driven by opioids and, to a lesser extent, suicide and alcohol. This suffering, they argued, was related to economic insecurity. Yet their analysis had major defects, such as a failure to adjust for ageing populations. The arrival of fentanyl has highlighted a more fundamental flaw: it now kills black people at a higher rate than white people, the group supposedly gripped by anguish. An ill-defined notion of “despair” that leaps between different segments of the population does not carry much explanatory heft.Some economists have homed in on the financial roots of the crisis. Justin Pierce of the Federal Reserve and Peter Schott of Yale University documented how areas most exposed to trade liberalisation suffered most. They found that counties exposed to import competition from China after 2000 had higher unemployment rates and more overdose deaths. Their analysis, however, ended in 2013, when the effects of this trade-related affliction were wearing off—and just before the fentanyl storm erupted.Others have traced America’s addiction to the original sin of pharmaceutical firms pushing painkillers. In a paper published in 2019 Abby Alpert of the University of Pennsylvania and colleagues showed that states with looser prescription rules were targeted by Purdue Pharma in the late 1990s when it started selling OxyContin, its notorious opioid, and that they had nearly twice as many deaths from opioid overdoses as states with stricter rules over the following two decades. But recent years have been horrific everywhere: in California, a state with stricter rules, the opioid-overdose death rate roughly tripled between 2017 and 2021.At last, economists are catching up with the awful turn in the opioid crisis. A new working paper by Timothy Moore of Purdue University, William Olney of Williams College and Benjamin Hansen of the University of Oregon offers a novel way of examining the spread of fentanyl. Rather than trying to account for demand for opioids, the focus of most research, they look squarely at the supply side of the equation, finding a strong correlation between aggregate import levels and opioid use. In states that import more than the national median, overdose deaths are roughly 40% higher. Put another way, 10% more imports per resident are associated with an 8.1% increase in fentanyl deaths from 2017 to 2020.This is not because of some kind of trade-induced economic malaise. Many big importing states are wealthy, such as New Jersey and Maryland. Rather, the essential point is that these states bring in more stuff from abroad, and fentanyl is often part of the mix. It may ultimately travel around America, but much of it remains, and kills, in the states where it first arrived. None of the previous hypotheses—deaths of despair, competition from China or opioid marketing—have an impact on the relationship between trade flows and fentanyl deaths.Policy responses often centre on the roles of China as a producer of fentanyl-related chemicals and Mexican drug gangs as distributors. America’s drug enforcers are especially active on its southern border; its diplomats want China to crack down on makers of synthetic opioid feedstocks. But Mr Moore and his colleagues conclude that more trade with pretty much anywhere is associated with fentanyl deaths. The probable explanation is that gangs are nimble and shift their smuggling routes.Slow it downThis makes intuitive sense. Fentanyl’s danger stems from its potency: it is up to 50 times stronger than heroin. Criminals can sneak in tiny volumes, with devastating effects. And drug users can get one hell of a high for next to nothing: a single $5 pill contains a lethal dose. In business terms the overall picture is that of a classic positive supply shock—of a most negative product.The forensic accounting of fentanyl’s spread by Mr Moore and his colleagues is important. It suggests that targeting China and Mexico risks a game of whack-a-mole. Any country at any given moment may be the trouble spot, so it is better to spread out enforcement resources more evenly. It also shows that legal trade is probably the main conduit for fentanyl smuggling, meaning that more sophisticated screening operations at all ports of entry would be wise. Last, it reveals that despite all the attention paid to the disadvantaged and the despairing, the core problem is at once simpler and more depressing: fentanyl is just too easy to get. ■Read more from Free exchange, our column on economics:Why economists are at war over inequality (Nov 30th)How to save China’s economy (Nov 23rd)The false promise of green jobs (Oct 14th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

Robinhood on Thursday launched its crypto service in the European Union, allowing users to buy and sell a range of over 25 digital currencies.
The move marks Robinhood’s second big expansion outside the U.S. after the firm opened a waitlist for U.K. customers to join its stock-trading platform in early 2024.
Several major U.S. crypto firms are turning to the European Union for growth after facing a tough time from regulators stateside.

Robinhood logo displayed on a phone screen and representation of cryptocurrencies are seen in this illustration photo taken in Krakow, Poland on January 29, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Nurphoto | Nurphoto | Getty Images

Online brokerage giant Robinhood on Thursday said it’s launching a cryptocurrency trading feature in the European Union, pushing further outside the United States as the company looks to unlock growth from international markets.
Robinhood said its new crypto product would allow customers to buy, sell, and hold from a range of more than 25 tokens, including bitcoin, ether, ripple, cardano, solana, and polkadot. The company hopes to offer more tokens, as well as the ability to transfer and “stake,” or earn rewards from, crypto in 2024.

The move marks Robinhood’s second major expansion outside of the U.S., after it announced late last month that it plans to launch stock trades for U.K. customers by early 2024. The company opened a waitlist in the U.K. last week for the service, which will offer yields of up to 5% on customer deposits.
Robinhood is looking to tempt EU users into using its service with the ability to earn free bitcoin for users who trade lots and refer the app to their friends. The company will offer users up to one bitcoin, based on a a percentage of their monthly trading volume and the number of users they refer when they sign up.
It comes as several major U.S. crypto firms are turning to the European Union for growth after facing a tough time from regulators stateside. The U.S. Securities and Exchange Commission has targeted several crypto firms, including Coinbase and Binance, with lawsuits alleging they violated securities laws.
The EU, meanwhile, has proposed a comprehensive set of regulation, called the Markets in Crypto-Assets regulation, that would bring in stricter rules for crypto trading platforms and issuers of so-called stablecoins — tokens pegged to real-world assets like the U.S. dollar or euro.

Johann Kerbrat, general manager for Robinhood Crypto, said the firm chose the EU as the first international target market for its crypto product due to the region’s development of the world’s first comprehensive set of laws specifically tailored for the crypto industry.

“The EU has developed one of the world’s most comprehensive policies for crypto asset regulation, which is why we chose the region to anchor Robinhood Crypto’s international expansion plans,” Kerbrat said in a statement Thursday.
Robinhood also touted transparency and security features in its European crypto offering to convince users to trade with its service. The company said it would transparently display spreads on trades, including the rebate the firm receives from sell and trade orders.
Robinhood said it never commingles customer coins with business funds other than for operating purposes, such as payment of blockchain network fees, and stores all its customers’ coins in cold wallets disconnected from the internet.
Robinhood said it also has a crime insurance policy in place to ensure a portion of assets held across its storage systems are protected against losses from theft, including cybersecurity breaches. The policy is underwritten by underwriters at Lloyd’s, the insurance marketplace.
Theft of crypto has been a big problem for the industry over the past couple of years, with major hacks of blockchain networks resulting in millions’ worth of digital coins being drained from users’ wallets. Just last month, the HTX exchange and Heco bridge, two platforms linked to high-profile entrepreneur Justin Sun were hacked for an estimated $115 million.
The blurring of lines between trading venues and custodians became a big problem last year when FTX, the disgraced former $32 billion crypto exchange, collapsed after revelations that its sister market-making firm Alameda Research used customer funds to make risky bets on certain tokens. More

The CEOs of eight banks sought to raise alarms over a sweeping set of higher standards known as the Basel 3 endgame.
“The rule would have predictable and harmful outcomes to the economy, markets, business of all sizes and American households,” JPMorgan Chase CEO Jamie Dimon told lawmakers.
Democratic Sen. Sherrod Brown, chairman of the Senate Banking Committee, ripped the banks’ lobbying efforts against the proposed rules.

(L-R) Brian Moynihan, Chairman and CEO of Bank of America; Jamie Dimon, Chairman and CEO of JPMorgan Chase; and Jane Fraser, CEO of Citigroup; testify during a Senate Banking Committee hearing at the Hart Senate Office Building on December 06, 2023 in Washington, DC.
Win Mcnamee | Getty Images

Wall Street CEOs on Wednesday pushed back against proposed regulations aimed at raising the levels of capital they’ll need to hold against future risks.
In prepared remarks and responses to lawmakers’ questions during an annual Senate oversight hearing, the CEOs of eight banks sought to raise alarms over the impact of the changes. In July, U.S. regulators unveiled a sweeping set of higher standards governing banks known as the Basel 3 endgame.  

“The rule would have predictable and harmful outcomes to the economy, markets, business of all sizes and American households,” JPMorgan Chase CEO Jamie Dimon told lawmakers.
If unchanged, the regulations would raise capital requirements on the largest banks by about 25%, Dimon claimed.
The heads of America’s largest banks, including JPMorgan, Bank of America and Goldman Sachs, are seeking to dull the impact of the new rules, which would affect all U.S. banks with at least $100 billion in assets and take until 2028 to be fully phased in. Raising the cost of capital would likely hurt the industry’s profitability and growth prospects.
It would also likely help nonbank players including Apollo and Blackstone, which have gained market share in areas banks have receded from because of stricter regulations, including loans for mergers, buyouts and highly indebted corporations.
While all the major banks can comply with the rules as currently constructed, it wouldn’t be without losers and winners, the CEOs testified.

Those who could be unintentionally harmed by the regulations include small business owners, mortgage customers, pensions and other investors, as well as rural and low-income customers, according to Dimon and the other executives.
“Mortgages and small business loans will be more expensive and harder to access, particularly for low- to moderate-income borrowers,” Dimon said. “Savings for retirement or college will yield lower returns as costs rise for asset managers, money-market funds and pension funds.”
With the rise in the cost of capital, government infrastructure projects will be more expensive to finance, making new hospitals, bridges and roads even costlier, Dimon added. Corporate clients will need to pay more to hedge the price of commodities, resulting in higher consumer costs, he said.
The changes would “increase the cost of borrowing for farmers in rural communities,” Citigroup CEO Jane Fraser said. “It could impact them in terms of their mortgages, it could impact their credit cards. It could also importantly impact their cost of any borrowing that they do.”
Finally, the CEOs warned that by heightening oversight on banks, regulators would push yet more financial activity to nonbank players — sometimes referred to as shadow banks — leaving regulators blind to those risks.
The tone of lawmakers’ questioning during the three-hour hearing mostly hewed to partisan lines, with Democrats more skeptical of the executives and Republicans inquiring about potential harms to everyday Americans.
Sen. Sherrod Brown, an Ohio Democrat, opened the event by lambasting banks’ lobbying efforts against the Basel 3 endgame.
“You’re going to say that cracking down on Wall Street is going to hurt working families, you’re really going to claim that?” said Brown, who chairs the Senate Banking Committee. “The economic devastation of 2008 is what hurt working families, the uncertainty and the turmoil from the failure of Silicon Valley Bank hurt working families.” More