The Japanese Experience


Junior member
I apologies as this post is possibly out of context on this site. However all the recent talks of deflation, 0% interest rates and the Japanese experience has lead me to wonder over the strong price increases in the UK property market over the last couple of years.

It is accepted that as interest rates drop the property market moves up as there is insufficient supply and people can afford higher mortgages.

Now it seems to me from the Japanese experience that there is a point where this argument no longer holds true and property prices fall as we approach 0% and deflation kicks in leading to higher unemployment.

I have done numerous searches but can not find any information on the subject, can anyone point me in the right direction or clarify this situation.

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Yes, You are discussing several things at the same time colliding with each other.
First of all an easing of interest rates increases the public ability to borrow.
A tightening of interest rates decreases the public ability to borrow.
This is separate to state of housing availability. If no new houses are being built, meaning there isa chronic shortage made worse by an expanding population then it does not matter whether interest
rates go up or down, the market value of properties will increase. This is detached from the public's ability to buy them, since mortgages which are a form of credit have to be linked( from the point of view of a lender) to the borrower's ability to pay. A point of equilibrium may eventually be reached at which prices peak. The govt may then step in to stop the economy from overheating, since too much borrowing (which is spending) causes inflation. Inflation is destructive to industry and commerce, and the general economic health of the nation. The govt will have to intervene through interest rates and via the exchange rate of the currency. The dreaded dragon is not deflation nor inflation, because economic measures can be put in place to counter them. The most dangerous economic condition is that of stagnation, leading to stagflation, that is very real risk of a slump which is a depression, in which nothing moves and there is no confidence and this can take a very long time to repair if it is deep enough, and it is in these economic conditions that mass unemployment occurs, bringing down the whole kaboodle. We can see how the govt can have either an expansionist policy or not, how interest rates can be altered, how the currency can be supported in the FX market by intervention, how the excheqeur can play a hand with taxes as a result of being used as an instrument of policy, in fact how inflation, interest rates, and exchange rates can be tinkered with to keep the economy on a more or less even keel, to keep either a slump or conditions of hyperinflation (which are equally) damaging, at bay. Go to your library and read some textbooks on economics, formerly known as political science.
The govt will have to intervene through interest rates and via the exchange rate of the currency.

This may have been previously true but this government gave up its right to directly set interest rates and gave it to the BOE which has limited its ability to have the influence that it once had on the economy. As an example back in 1992 the Chancellor raised intrest rates in one day by a staggering amount in an attempt to prevent the GBP from dropping out of the ERM when Mr Soros decided it was time that it did.

This type of action is no longer possible for a government in the UK

Simy, there's a good article in "Money Week" this week (which I'll send you if you PM me your address) explaining what's currently happening in the UK property market.

Two major factors.

The first is little to do with the interest rate per se, and more to do with the average cost of housing to average salary. We're now (in the UK) on an average multiple of 5.5. Historically, the property markets starts to top out at anything above a factor of 4. This is what has already started happening to London property prices.

The other issue which was highlighted is that the apparent 19.1% annual increase in property prices only applies to properties bought & sold. An obvious point in retrospect, but perhaps overlooked are all the properties still sitting on the market after 12 months even with massive reductions. These are not factored in any way into that figure.
Trader333 said:
This type of action is no longer possible for a government in the UK

Paul, do you think the MPC are entirely outside of any governmental influence?

No but there is now way they could pull some of the tricks they did in the past.

Trader 333 Is absolutely right in pointing out that the BOE ~ Govt relationship has changed and I stand to be corrected on that point, and I accept that what he says is correct. However interest rates have a direct effect on the currency for internal reasons. Money supply, borrowing etc., The BOE is still able to intervene in the FX market to sell pounds or to buy them, thus affecting the currency for external reasons which is the point I wished to make.

In addition the Govt is able to further adjust the above scenario by altering the amount of money and coin in circulation,M0, M1, M2, M3. M4. This has the additional effect of further buttressing the purchasing power of available money, or of weakening it, but the direct effect of increasing the amount of money in circulation carries with it the risk of inflationary increases so this is not desireable.

One could write a complete textbook on this topic alone, but that is enough to illustrate the intricate balances that can be applied to money supply as an instrument of policy, whether political or economic or both.
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