There will probably be spectacular gains in the Japanese stock market after the general election there next Sunday. This is what is forecast by those who have poured $10 billion into Japan in the last few days.
These investors are - wisely or not - trying to jump the gun where probable developments in the Japanese economy are concerned. The world's quality financial press is expecting a big change in Japan's economic strategy whoever wins the election.
Speculators are trying to anticipate future developments to achieve above-average returns on their investments.
Japan is like a spring which has been compressed for 15 years and is now ready to jump back into the air. It has long been a foregone conclusion that some deus ex machina would extricate Japan from its deflationary trap. This is better known to those familiar with John Maynard Keynes as the liquidity trap - when not even the lowering of interest rates to zero levels stimulates the economy, and management of the economy using the money supply becomes impossible.
Keynes had a remedy for this impasse and this was autonomous investment, which usually meant government investment in public works. Dictators like Hitler and Mussolini had another answer. This was the provocation of wars.
This time the 'deus ex machina' has manifested itself in the shape of the much-maligned international investment community, which will be performing the autonomous investment function in an efficient, corruption-free way.
International investors will demand international returns on their investments and these cannot be delivered with the widespread corruption, which has characterised Japanese government spending all these years. Japan will have to mend its ways where international investment is concerned and this augurs well for the whole economy.
International investment
There have been many false starts to Japanese economic recovery during the last 15 years. I would direct a serious investor to a special report on the Japanese economy which appeared in The Economist on November 2, 2002, entitled "The ghost of reforms past". The article showed how Japan's occasional attempts at economic reform were gruesome.
Autonomous investment was ruined by hopeless government corruption, the principal purpose of which was to buy votes. One cannot just throw money away, increase the national debt, and call it autonomous investment. The Economist report puts it brutally: "Japan has spent lavishly on public works throughout the past decade, which helped its gross public debt to reach 140% of GDP."
The report continues: "The tendency to blanket the countryside with roads, dams, and bridges is often cited as one of the main indictments of Japan's political system".
Japanese Prime Minister Koizumi is also aware of the rot at the heart of the Japanese banking system, as a result of political patronage. Banks accumulate their bad loans, as they are afraid of putting the government's political supporters out of business.
Koizumi has been trying to privatise Japan's postal system, which is a large bank with £3 trillion of savings and life insurance assets. This has led him to a confrontation with a section of his party, leading him to call an early election.
The Opposition party wants to go further down the privatisation road. So the privatisation issue is sure to be pursued with energy in any government budgetary policy which is bound to materialise - whoever wins the election.
International investors have not failed to spot the opportunity for their money, after the dramatic vote and its aftermath, which took place in the Japanese parliament on August 8.
The developments since then mean only one thing: the Japanese economy is to abolish the 15-year kleptocracy which was causing its deflation.
The institutionalised kleptocracy had led to a situation where heavily armed gangsters would burst into a bank's general meeting demanding money.
The only answer was privatisation. Japan in the last 15 years is a perfect example of the dictum "everybody's business in nobody's business".
Contrasting view
It is still possible to take a pessimistic or optimistic view of the current investment situation in Japan. There is also The Economist's view which is based on a position established by years of research and a record of correct economic forecasting on the specific problem.
The most pessimistic outlook on the potential investment boom was expressed by Channel 4 News economics correspondent Liam Halligan writing in The Sunday Telegraph of August 28. His article, though powerful, contains contradictions in many important respects.
Merryn Somerset Webb, a former stockbroker and current Money Week editor, wrote a highly optimistic article on conditions in Japan in London's The Sunday Times on the same day. She raised doubts on important statistical facts. Ms Somerset Webb has a deep, personal knowledge of Japan, after working there for many years. She admits thhe many false hopes she had on the recovery of Japan from its 15-year deflation. She claims to utilise that experience in her detection of the present rally.
The contradictions in Liam Halligan's article are all too evident. He ends by praising Koizumi's attempt to privatise the post office, Japan's greatest bank and a veritable engine of political cronyism. He admits that Japan is in the throes of a vast political change, which can only radically alter its economic policies for the better.
He says of Koizumi: "By throwing his party into turmoil, and forcing a proper election on contentious issues, Koizumi has done nothing less than finally give Japan the change of becoming a genuine democracy."
Here lies the principal contradiction in the Halligan article. He won't buy the 'booming Japan' story, but cares to strongly believe that Japan has the best chance to become a genuine democracy and rid itself of the cronyism, which has caused inefficiency and utter corruption.
He also seems to present a false picture of Japan's GNP by saying that "for a start, GDP rose by a mere 0.3 per cent in the second quarter of this year - weaker than expected."
When Ms Somerset Webb spoke of Japanese GDP she said that it has been rising at three per cent. Reading these figures one suspects that Liam Halligan is trying to present a distorted picture of the GNP situation, by quoting statistics out of context.
Ms Somerset Webb presents a strong statistical picture to back her optimism. She says: "Around this time last year in this column I said I had no hard feelings. In fact, I thought it was time to buy back into the Japanese market. 'Deflation is moderating' I wrote, 'consumer confidence is rising, company profits and cash flows are soaring and, best of all, the market is trading on an average p/e of around 17 times - the lowest for a good 20 years'."
Merryn Somerset Webb concludes her argument by saying: "Everything positive I said about the market last year still stands - in fact. Things are even better. GDP is rising at over three per cent, the Bank of Japan has suggested that the end of deflation is near, bank lending is forecast to turn positive this year after falling for 10 years, land prices are finally recovering (they're up in Tokyo for the first time in 14 years), wages and consumption are rising, and companies are spending money too - capital expenditure has exceeded all expectations so far 2005."
The Economist
The Economist has been closely monitoring the Japanese economic situation for many years, and the central point of its analysis has always been that before Japan took its bad bank loans seriously, there was no hope of it ending its deflation. Bad loans were nothing but the result of political cronyism.
The Economist said so on November 2, 2002. It is now seeing that Koizumi's magnificent stand on the privatisation of the Post Office Bank is a serious attempt of dealing with Japan's bad debt issue and consequently of a massive turnaround of its economy.
On August 13 it said: "Despite all the political turmoil this week, the stock market rose by 5.3 per cent between midday Monday (just before the upper house voted) and Thursday afternoon - closing at a four-year high."
Whether investors decide to jump the gun or not as far as investing in Japan is concerned, there is nothing like events on which to form one's financial opinions.
Mr Azzopardi Vella has advised Standard and Poors and promoted the Malta Development Fund. He is executive manager at DBR Investments Ltd.