Raphael Stevens

Foreign visitors have come flooding back to Japan since it reopened to travel in late 2022, making up for three years’ absence during the covid-19 pandemic. The weakness of the yen has produced some bargains for these recent arrivals. For the first time in a much longer period, investors are similarly excited about the bargains to be found in Japanese stockmarkets. Unfortunately, much like the travellers who zip through Tokyo in go-karts dressed as Mario and Luigi, many now risk going overboard in their newfound enthusiasm.From January to August foreigners bought ¥6.1trn-worth ($40bn-worth) of Japanese stocks, which represents the largest nominal inflow during the same timeframe since 2013. According to a survey by Bank of America, more fund managers are now overweight the country’s shares (ie, investing more than they usually would) than at any time in almost five years. The return of investors to Japan’s markets has been driven by optimism about reforms to corporate governance, with companies increasingly subject to investor activism and therefore returning cash. High-profile winning bets on Japan’s trading companies by Warren Buffett, a famous investor, have provided a boost. So has the fact that Japanese stocks have returned 13% this year, in dollar terms, compared with a 10% rise globally.All this optimism will soon be put to the test. After all, it is not just prospects for corporate-governance reform that have fuelled the rise in Japanese stocks; it is also the astoundingly cheap yen, and that may not last. The currency trades at ¥149 to the dollar, its weakest in three decades—down by 23% since the end of 2021. Japanese exporters, which face domestic costs but make much of their revenue overseas, have benefited enormously from this state of affairs.The yen’s weakness has been caused by huge differences in interest rates, with capital flows moving to higher-yielding assets. Unlike almost every other central bank, the Bank of Japan (boj) has refused to raise rates: its short-term interest rate remains at -0.1%. Yet observers increasingly expect the boj to shift, abandoning its cap on ten-year government-bond yields and raising rates for the first time since 2007. Japan’s “core core” inflation, which strips out fresh food and energy prices, sits at 4.3%, far above the central bank’s target. Even a small rate rise would squeeze the government, which last year had net debts equivalent to 163% of Japan’s gdp, twice the rich-world average.Some had thought that a virtuous cycle of mild inflation and stronger wage growth might finally be returning to Japan after decades of torpor, which would have made higher rates and a stronger yen less bothersome. But after months of waiting there is little evidence that pay really is rising. Employee earnings have dropped 2% in real terms in the past year and by 8% in the past decade. The ratio of job vacancies to applicants, which reached around 1.6 in 2018 and 2019, is now at 1.3, and falling rather than rising. Thus if the boj is dragged into tighter policy, it will not be by a budding recovery. Rather, it will be because of external pressure. With oil prices hovering above $90 per barrel, inflation in energy imports will filter through to other prices over time.Even if the boj does manage to stick to its guns, the gulf between American and Japanese interest rates looks unlikely to widen much, since the Federal Reserve has paused its rate rises. The transitory effects of the weaker yen will therefore begin to ebb for Japanese companies. A fall in the yen will boost earnings once, as foreign revenues are magnified in yen terms relative to the previous year. However, unless the yen continues falling, the support is a one-off. If the American economy weakens and investors come to expect interest-rate cuts, the yen will almost certainly surge against the dollar, weakening overseas earnings in the opposite way.Reforms to Japanese corporate governance are not to be sniffed at, and some beaten-down companies still present opportunities. Yet these bright spots will not be enough to overwhelm the macroeconomic gloom that is now enveloping Japan. Global investors sometimes seem capable of holding only one narrative in mind when it comes to the country: Japan is either a stagnant mess, with little hope of rescue, or is on the verge of an epoch-defining revival. This dichotomy does not apply today. The overwhelmingly positive trend in Japan’s corporate governance must be set against the trickier situation it is facing in the currency markets.■Read more from Buttonwood, our columnist on financial markets: How to avoid a common investment mistake (Sep 21)Why diamonds are losing their allure (Sep 13th)Should you fix your mortgage for ever? (Sep 7th)Also: How the Buttonwood column got its name More

For sri lanka’s politicians September 27th was meant to be the light at the end of the tunnel. After more than a year of economic free fall—in which the former president fled protests, gdp shrank by 9% and billions of dollars of arrears piled up—the imf was in town, ready to release $330m from a bail-out agreed in March. There was even talk that the country’s creditors would reach a deal to cut back its debts.Yet the fund’s officials flew back from Colombo without releasing a dollar. The problem was two-fold: Sri Lanka’s tiny tax take and China, which is the country’s biggest creditor. The imf cannot lend more unless Sri Lanka restructures its debts, since the country owes so much elsewhere that officials cannot otherwise be sure they will get their money back. Therefore by refusing to take a haircut on its debts, China is holding up Sri Lanka’s restructuring—as it is in other indebted countries, too.image: The EconomistOn the same day that the imf officials departed, Bloomberg, a news service, reported that other national creditors, led by India, were working on a deal, and that it would not include China. They may end up insisting that Sri Lanka suspends repayments to China or forces it onto a comparable deal. Either would be almost impossible to enforce. Creditors usually only agree to something because everyone agrees to the same terms. Even creditors at war with one another usually manage to hash out a deal. The decision to proceed without China reveals the extent of the breakdown in sovereign-debt negotiations.It was hoped that a recent deal in Zambia, to which China signed up, would provide a template. But the solution was unique to the structure of Zambian debt, which allowed creditors to relabel some Chinese lending as private rather than public. And China only agreed to much of the compromise, which includes low interest rates and slower repayment, on the condition that it could back out if Zambia’s economy picked up. At a recent g20 summit, where the agenda ranged from cryptocurrencies to global tax, officials observed that debt restructuring was the issue on which the least progress had been made.Worse, middle-income countries like Sri Lanka cannot even get into the process through which Zambia secured its deal. The Common Framework, a g20 mechanism for creditors, only applies to poor countries. Middle-income ones must negotiate with China alone. Chinese officials refuse even to sit on a committee with the rest of Sri Lanka’s national creditors. Many economies near default today, from Egypt to Pakistan, are also too rich to qualify.Sri Lanka’s situation also exposes a worrying new fault line. Some think that China was put off joining Sri Lanka’s creditor committee because India was a co-chair. After all, it was willing to participate in Zambia’s committee, which it jointly led with France. Such tensions will only become more of a problem, since India’s lending is growing. Bradley Parks of William & Mary, an American university, suspects that India’s officials have decided to lend to countries already indebted to China to counter their rival’s influence. Future standoffs are therefore likely to be in places where both countries are big creditors.This week’s check-up was the first by the imf in a defaulting country in the Asia-Pacific region since the financial crisis there more than 20 years ago, when it doled out $35bn to Indonesia, South Korea and Thailand, and was so busy that South Koreans called events “The imf Crisis”. Then the fund was in the thick of things—now it can do little but sit and watch. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

One of the most anodyne phrases a central banker can utter is that they are “data-dependent”. It is a sophisticated way of saying that they do not know the future, and so will wait and see what the numbers look like. These days, though, declarations of data dependence by the Federal Reserve are more interesting: they sound like plaintive pleas rather than statements of the obvious. Many of the data points that allow the Fed, analysts and investors to understand the American economy are on the verge of disappearing, a casualty of the looming government shutdown.Congress faces a deadline of midnight on September 30th to pass a bill to keep the federal government funded. Given the stubbornness of hardline Republicans, who wield near-veto power in the House of Representatives, the chances that America’s legislature will miss the deadline are high and rising. The most recent government shutdown, which started towards the end of 2018, lasted for 35 days, meaning it could easily be November before federal employees get back to work this year.The straightforward economic impact of a shutdown is milder than often imagined. Unlike in the disastrous scenario of a debt-ceiling induced default, the government would continue to meet its mandatory obligations such as providing income support to the elderly. It is the so-called discretionary parts of federal spending—from crop insurance for farmers to money for highways—that would be halted. These account for about 27% of the government’s budget. A rule of thumb, based on past experience, is that each week of a government shutdown shaves about a tenth of a percentage point from the annualised rate of gdp growth in the quarter when it occurs. But when federal offices reopen, workers receive back-pay, and the hit to growth is mostly papered over.The less widely appreciated concern is that the government will be unable to collect and publish a wide array of the economic data that are the lifeblood of financial markets. Retail sales, housing starts, personal income, gdp and, most crucially, inflation—all these reports will be suspended while the government is shut. The blackout will be more of a problem than during the 2018-19 saga, because on that occasion the Bureau of Labour Statistics (bls), responsible for inflation figures, among others, had already received funding and so could continue to operate. If a shutdown starts next week, the bls would go offline, joining the Census Bureau and the Bureau of Economic Analysis, two other stalwarts of official statistics.The Fed’s policymakers would not be entirely bereft of information about the economy. For starters there are plenty of regular private-sector indicators of which they already make use: multiple reports on the job market, alternative indicators of inflation and surveys of both consumer and business sentiment. Financial information from banks and state-level figures, especially tax receipts, are useful. Plus the central bank has regional offices that will continue to collect data about their local economies. The problem, however, is that none of these fallbacks has the same combination of nationwide scope, methodological rigour and track record as, say, the bls’s consumer price index. “It would be very awkward for the Fed if it made a decision based on its own regional data, and then when the national data comes out, it’s actually quite different,” warns Joseph Wang, a former Fed trader.This risk could well tip the Fed towards being more doveish in its next interest-rate decision at the start of November. Why raise rates again if there is little visibility about how the economy is performing? If the government reopens and it turns out that inflation was too hot, the Fed could always catch up with a rate increase at its December meeting. By contrast, if the Fed raises rates in November and it then emerges that the economy has in fact slowed sharply, the central bank would have to consider reversing its move—far more awkward to explain than a slightly belated rate hike. The Republican hardliners who are driving the government to a shutdown do not want to be thought of as inflation doves, but that is the strange consequence of their intransigence. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Over the past year few currencies have done worse than Russia’s rouble. Last September an American dollar bought just over 60 of them. These days it will buy almost 100 (see chart 1). The drop is both a symbolic blow to ordinary Russians, who equate a strong currency with a strong country, and the cause of tensions in the Russian state. It has blown apart the consensus that existed among Russian policymakers last year, when the central bank and finance ministry worked hand in glove. Now, as inflation rises and growth slows, the two institutions are turning against one another. At stake is the country’s ability to wage war effectively.image: The EconomistDuring the conflict’s early stages, Russian officials had a straightforward task: it was their job to stop the economy collapsing. Immediately after the invasion began, this involved preventing people from pulling money out of the financial system, by implementing capital controls and doubling the policy interest rate. The rouble hit 135 to the dollar, before recovering. The economy nosedived and then improved (see chart 2). Funded by juicy revenues from sales of oil and gas, the finance ministry then kept the show on the road by lavishing spending on defence and welfare.image: The EconomistStrong oil-and-gas exports also caused the rouble to appreciate, lowering import prices and in turn inflation. This allowed the central bank to accommodate fiscal expansion, cutting interest rates to below where they had been on the eve of the invasion. Over the course of 2022 consumer prices rose by 14% and real gdp declined by 2%—a weak performance, but miles better than forecasters had predicted. Last week Vladimir Putin noted that “the recovery stage for the Russian economy is finished”.The new stage of the economic war presents officials with tough choices. Mindful of a presidential election in March, the finance ministry wants to support the economy. Bloomberg, a news service, has reported that Russia is planning to increase defence spending from 3.9% to 6% of gdp. The finance ministry also wants to raise social-security spending. Mr Putin is keen to run the economy hot. He recently boasted about Russia’s record-low unemployment rate, calling it “one of the most important indicators of the effectiveness of our entire economic policy” (conscription and emigration no doubt helped).Yet the central bank is no longer keen to assist. The problem starts with the rouble. It is sliding in part because businessfolk are pulling money from the country. Low oil prices for much of this year have also cut the value of exports. Meanwhile, Russia has found new sources of everything from microchips to fizzy drinks. Resulting higher imports have raised demand for foreign currency, cutting the rouble’s value.A falling currency is boosting Russian inflation, as the cost of these imports rises. So is the fiscal stimulus itself, warned Elvira Nabiullina, the central bank’s governor, in a recent statement. Consumer prices rose by 5.5% in the year to September, up from 4.3% in July. There are signs of “second-round” effects, in which inflation today leads to more tomorrow. Growth in nominal wages is more than 50% its pre-pandemic rate, even as productivity growth remains weak. Higher wages are adding to companies’ costs, and they are likely to pass them on in the form of higher prices. Inflation expectations are rising.This has forced Ms Nabiullina to act. In August the central bank shocked markets, raising rates by 3.5 percentage points and then by another percentage point a month later. The hope is that higher rates entice foreign investors to buy roubles. Raising the cost of borrowing should also dampen domestic demand for imports.But higher rates create problems for the finance ministry. Slower economic growth means more joblessness and smaller wage rises. Higher rates also raise borrowing costs, hitting mortgage-holders as well as the government itself. Last December the finance ministry decided it was a good idea to rely more heavily on variable-rate debt—just as borrowing costs began to rise. In August, conscious of higher rates, it then cancelled a planned auction of more debt.Mr Putin would like to square the circle, defending the rouble without additional rate rises. He has therefore asked his policymakers to find creative solutions. Two main ideas are being explored: managing the currency and boosting energy exports. Neither looks likely to work.Take the currency first. The government is keen to mandate exporters to give up more hard cash and make it harder for money to leave the country. In August officials started preparing “guidelines” that would “recommend” firms return not just sale proceeds but also dividend payments and overseas loans. On September 20th Alexei Moiseev, the deputy finance minister, hinted that capital controls were being considered to stem outflows to every country, even those deemed “friendly”.Such measures are, at best, imperfect. Russia’s export industries form powerful lobbies. The experience of the past 18 months is that the firms which dominate energy, farming and mining are skilled at poking loopholes in currency controls, says Vladimir Milov, a deputy energy minister in the early days of Mr Putin’s reign. Waivers and exemptions abound. In late July Mr Putin issued a decree allowing exporters operating under intergovernmental agreements, which cover a big chunk of trade with China, Turkey and others, to keep proceeds offshore.Civil warThe Kremlin also wants to create artificial demand for the rouble by forcing others to pay for Russia’s exports in the currency. Central bankers seem to think this plan is pretty stupid. “Contrary to popular belief,” as Ms Nabiullina noted in a speech on September 15th, the currency composition of export payments has no “notable impact” on exchange rates. The only thing that changes is the timing of the conversion. Either an exporter paid in dollars uses them to buy roubles, or the customer buys the roubles themselves. What might help Russia more would be to pay for more of its imports in domestic currency so as to save foreign exchange—and then for foreign sellers to keep hold of those roubles. But there is little sign of that happening.Russia might consider using its foreign reserves to intervene in currency markets. Yet more than half of its $576bn-worth of reserves, held in the West, are frozen. Using the rest is hard because most of Russia’s institutions are under sanctions that limit their ability to conduct transactions, says Sofya Donets, a former Russian central-bank official. And the country’s available reserves, which have shrunk by 20% since before the war, could only defend the rouble for a little while anyway.image: The EconomistShort of raising rates, the only workable way to support the rouble is to boost energy exports. In theory, two factors are working in Russia’s favour. One is a rising oil price. Since July production cuts by Saudi Arabia and receding fears of a global recession have helped raise the price of Brent crude by nearly a third, to $97 a barrel. The other factor is a narrowing gap between the price of Urals, Russia’s flagship grade, and Brent, from $30 in January to $15 today (see chart 3). This gap is likely to continue to shrink. Since December members of the g7 have barred their shippers and insurers from helping to ferry the fuel to countries that still buy it unless it is sold under $60 a barrel. Russia’s response has been to build a “shadow” fleet of tankers, owned by middlemen in Asia and the Gulf, and to use state funds to insure shipments.However, Russia’s oil-export proceeds will probably not rise more. Higher prices may depress consumption in America; China’s recovery from zero-covid seems over. Reid l’Anson of Kpler, a data firm, estimates that America, Brazil and Guyana could together increase output by 670,000 barrels a day next year, making up for two-thirds of Saudi Arabia’s current cuts. Futures markets suggest that prices will fall during much of 2024. Although Russia could export more oil to make up for this, doing so would accelerate the slide.The other bad news for Russia is that it must now earn more from oil merely to keep its total export revenue flat, owing to declining gas sales after the closure of its main pipeline to Europe. In the fortnight to September 19th these were a paltry €73m ($77m), compared with €290m last year. There is talk in the eu of curbing imports of Russian liquefied natural gas. Europe’s nuclear-power generators are also cutting their dependence on Russian uranium.All this means that, as Russia’s inflation troubles persist, the tussle between the government and the central bank will only intensify. The temptation to splurge ahead of the presidential vote next year will fan tensions, forcing the central bank either to crank up rates to debilitating levels or to give up the fight, leading to spiralling inflation. Alternatively, Mr Putin could cut military spending—but his plans for 2024 show he has little interest in doing that. The longer his war goes on, the more battles he will have to fight at home. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Here are some stark facts about family structure and children in America. Whereas the poverty rate among youngsters living with two married parents is 7.5%, among those raised by a single mother it is 35%. Children of married parents tend to behave better in school, stay in education longer and earn more as adults. Those raised by married parents appear to be at an advantage even after controlling for the age, education and race of their mothers.Yet marriage has been in long-term decline (and without a compensating rise in unmarried cohabitation). Today more than two-fifths of births are to unmarried mothers, up from less than a fifth in 1980. The fall is unequal across demographic groups: only 11% of births to college-educated mothers are outside wedlock. Marriage has gone from being a pretty universal institution to an exclusive one that propels life advantage through generations.In recent years economists have documented these trends and their relationship to inequality and social mobility. Melissa Kearney of the University of Maryland summarises the literature in a new book, “The Two-Parent Privilege”. Ms Kearney is aware that many liberals—and very few conservatives—will wince at her findings, and writes in an almost apologetic tone as a result. “Not talking about these facts is counterproductive,” she pleads.Why does being raised by two parents matter so much? One reason is the extra earnings an additional adult may bring to a household, which contribute to the enormous costs of child-rearing. Yet it is not all about money. Children raised by mothers who divorce and remarry tend to do worse than those raised by both their biological parents. The beneficial effects of two-parent child-raising appear to be particularly strong for boys, and even spill out beyond the boundary of the home. Researchers have found that the number of black fathers living in the local neighbourhood strongly influences the life chances of black boys.The question is what to do about all this. Ms Kearney does not argue for a return to conservative social practices, such as shotgun marriages after unplanned pregnancies or encouraging parents to remain in unhappy unions. She cites research showing that legal changes making divorce easier (the introduction of “no fault” or “unilateral” divorce) result in worse outcomes for affected children. But, she says, such laws have a big advantage: they help adults escape bad situations and are probably desirable as a result. On top of this, some households benefit from the absence of a negative influence. Children whose parents are charged with a crime tend to do better if that parent is sent to prison. If single mothers are single because the men who fathered their children would have been bad second parents, then their offspring would have had little chance of better life outcomes in the first place.Ms Kearney is more interested in whether the underlying causes of single parenthood can be fixed, so that more happy marriages are formed. She laments the long-term decline in the availability of good jobs for men without college education, which is thought to reduce the pool of “marriageable men” and—consequently—present fathers. She also highlights that social norms now exert less pressure, even on parents in a healthy relationship, to live together. To demonstrate the importance of these norms, she compares the effects of two economic booms that took place a generation apart. The Appalachian coal rush of the 1970s and 1980s boosted men’s wages; the result was more marriages and, for married couples, more births—but not more births out of wedlock. Decades later, amid different norms, the shale oil and gas booms had different effects. They boosted births among married and unmarried women alike, and had no effect on the propensity of couples to marry. Therefore Ms Kearney concludes that both money and mores are needed for additional two-parent homes to form.For all the striking statistics in the book, the author does not offer an especially rousing call to arms. Ms Kearney’s four prescriptions are to promote a norm of two-parent homes, to improve the economic position of men without a college education, to scale up the pro-family programmes that work and to strengthen the social safety-net for all family types.Yet policymakers are already obsessed with male-dominated middle-class manufacturing jobs. Recently this has meant more protectionism and other policies that do more harm than good. And it is doubtful that governments can do all that much to alter social norms, just as they hold little responsibility for the fact that they changed in earlier decades. Past research (of which Janet Yellen, America’s treasury secretary, was a co-author) has theorised that technological development—namely, the wider availability of contraception and abortion—was the fundamental cause of the rise of single parenthood in the late 20th century, because it altered the premarital behaviour of both men and women. Although some conservatives argue that the welfare system is instead to blame, since it made single motherhood a less daunting financial prospect, this is at odds with the evidence. As Ms Kearney notes, restricting welfare does not reduce births and single-motherhood is more common in America than in countries with generous handouts. Moreover, the record of trying to promote marriage with tax incentives and the like is one of failure. Without more concrete proposals, Ms Kearney is at risk of having identified a trend that correlates with poverty, but is no easier to solve.Happy familiesPerhaps knowledge of what produces successful adults is most useful to individuals planning their own lives. The safest bet for anyone who wants to have children who thrive is probably to settle down. The vast majority of college graduates already seem to believe this, at least based on how they behave, if not how all of them talk. Anyone who doubts that the two-parent privilege exists should read Ms Kearney’s book. Unfortunately, that does not mean there is much in its pages for policymakers to exploit. ■Read more from Free exchange, our column on economics:Renewable energy has hidden costs (Sep 21st)Does China face a lost decade? (Sep 10th)Argentina needs to default, not dollarise (Sep 7th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More