The Japanese Mind:

Understanding Contemporary Japanese Culture

Book By Roger J Davies & Osamu Ikeno

Review & Article by GlobalMacroForex

Even though this book makes no mention of interbank interest rates or central bank meetings, I’m applying the information from these various Japanese authors to modern practical portfolio management.

There are some people who think that understanding Japanese culture would provide no benefit to trading the yen or Nikkei 225.  These critics think that the currency or stock markets move purely on economic mathematical fundamentals.  I hate to burst your burst your ‘efficient robot hypothesis’, but people around the world have different desires, goals, and values.  Currencies are a literal reflection of these values.  If we’re going strictly off math fundamentals than the yen should hyperinflate today because they are so indebted that there is no way to move forward without printing massive amounts of yen.  This totally worthless paper only continues to have value because of the collective psychology of the society.

This book is a collection of translated essays from various Japanese people.  There is quite a large breadth of topics covered.  However, in this article, I will be focusing only on those that directly relate to Global Macro trading. 

Groupthink mentality & consensus decision making

“In Japanese society, people are primarily group-oriented and give more priority to group harmony than to individuals”

The most “group think” nation had the biggest economic bubble in our modern era?  What a coincidence! 

In an American business meeting, people may openly disagree with each other.  They might each present their differing ideas and debate, leading to either a vote or the leader making a decision.  In Japanese business culture, things are radically different.  Instead, meeting participants rarely openly disagree with each other.  Instead, they meet or talk on the phone privately prior to the meeting one-on-one, to let each other know where they stand on the issue.  This way, once the meeting is taking place, a group consensus can quickly be reached.  The Japanese have a private and a public stance,

Honne is “what is intended”

Tatemae is “what is said”

What this means for Japanese politics is that legislation will likely always take most western journalists by surprise.  In America, we have a presidential democracy, meaning the president has separate powers from Congress.  This is a system of checks and balances where they debate and complain out in the open.  Japan doesn’t operate this way; instead, they have a parliamentary democracy.  In this system, the Diet (the name for their version of Congress) votes for a president.  So the executive branch is a reflection of the legislative branch’s desires.  What this means is that members of the Diet will be much more likely to meet in private and conclude on the action.

Relationship to interbank rates

TIBOR is the interbank lending rate among Japanese banks.  Like its British counterpart LIBOR, the rate is based on a survey of banks.  They poll them and then ask at what rate they would lend to another bank for different maturity lengths.  Then the highest and lowest numbers are discarded, and the rest are averaged.  LIBOR offers rates for many currencies (including the Yen).  so,

Yen LIBOR is for foreign banks lending each other yen offshore

TIBOR is for Japanese domestic banks lending each other yen inside Japan

Since 2014, LIBOR has come under legal scrutiny for rate manipulation by major British banks including Barclays.  Basically, the banks illegally reach a consensus with each other and try to swing the rate in a certain direction.  Applying the information I learned from this book, with the Japanese group consensus mindset and private meetings, their culture is more setup for this style of decision making.  Therefore the rate is more likely to hold the line since members of the group fear open disagreement with the consensus much more than their western counterparts for the same currency.  The Japanese TIBOR moves in harsh quick movements only after the Yen LIBOR rate has already moved.

The yen is one of the most volatile currencies, especially for a G7 nation.  Other currencies with the GDP, market capitalization, or economic clout of Japan don’t have the same volatility of the yen.  So why does the TIBOR move slow as molasses? 

“In a group-oriented society, it is important to be considerate of other people, and the Japanese style of communication is dependent on this kind of ‘mind-reading’”

Japanese bankers are making a consensus to manipulate the rate over their European/American counterparts who allow the rate to bounce around more until key movements.  It’s not that western banks are more honest, they just suck at coordinating in a consensus where some parties disagree. 

Why you should care

The LIBOR-TIBOR spread is called ‘the Japan Premium’.  It refers to the higher TIBOR rate than the Yen LIBOR because banks fear the credit risk of lending to domestic Japanese banks.  When Japan Premium goes up (LIBOR falls but TIBOR rises on bad news), the Yen will Rally on the bad news.  Since the Yen is a risk-off carry trade funding currency.  What’s going on in the chart below is Yen LIBOR is dropping but TIBOR isn’t catching up till later widening that ratio (for reasons we mentioned above, the Japanese bankers are better able to try to mask market problems).

I’m going to flip the LIBOR/TIBOR axis (in red) so you can see the interbank rates clearly moved days BEFORE the exchange rate,

Nonverbal communication

Iwanu ga hana means “Silence is golden”

Kuchi wa wazawai no moto means “out of the mouth comes evil”

I was surprised by multiple essays in this book describing how Japanese people love silence and nonverbal communication.  This book says so much of the context of what people mean is in the “unspoken”.  The reason I was surprised by this is that the Bank of Japan is the most verbal Central bank in the world!

The BoJ constantly makes threats to print money if speculators continue to raise the value of the yen.  But from realizing that the Japanese prefer surprise action formed from pre-decided group consensus, primarily communicated through nonverbal methods, one would realize that the Bank of Japan is not going to follow through with the majority of their threats.  If they actually believed they could swing the yen back from intervention without wrecking their economy in the process, they wouldn’t have to rely so much on verbal threats.

Do not question authority

“Japanese students hesitate to ask questions even if they do not understand for fear of disturbing the class.”

The chapter on child-rearing practices really shows how adults came to conform to the group consensus mentality.  It stems from not questioning authority as a child.  They give the example of mothers teaching their 4-year-old children to stack wooden blocks.  The American mothers explained the reasoning behind why the blocks were being placed in certain ways.  The Japanese mother just stacked blocks and the child copied it until the information “seeped down”.  Seep down is the buzz word for Japan’s method of learning by imitation.

“Horizontal relationships are not the norm in Japanese society, however, vertical hierarchies dominate”

In the chapter on Sempai-kohai aka “Seniority Rules”, they discuss how Japan isn’t a meritocracy but a hierarchical society where rank and age matter more. 

“The Japanese tend to make too much of rank even in daily life, for example, people can neither be seated nor talk without considering the status and seniority of the other people around them”

-Nakane (ibid, pp. 82-83)

This again demonstrates a non-questioning attitude that is beat into people’s minds since early childhood. 

Now flash forward to the forex markets.  There’s a huge debate going on about could the yen hyperinflate because Japan’s government is so heavily indebted and there’s been so much quantitate easing.  Japan is, even more, in debt compared to GDP than America.

Should even a little inflation show up, bond yields could skyrocket make the debt unserviceable.  Also, it raises questions of the ability of a society to swallow negative interest rates in an inflation environment (openly losing money for saving).

However, I don’t think the yen would hyperinflate before America.  First, the American debt owned by foreigners while the Japanese debt is owned domestically.  In addition to a currency to hyperinflate, citizens have to genuinely lose faith in the government which is the exact opposite of the Sempai-kohai hierarchical relationships which form the fabric of their society.  Even though Japan is technically indebted beyond any means to pay other than print money, I think the Japanese citizens will be willing to eat up the inflation at a much higher rate than westerners because the centralized authority has “seeped in”.

Now my critics could argue that during the aftermath of Tsunami, many Japanese parents openly questioned the job the government had done in cleaning up the nuclear waste.  That being said, a key role in the yen’s value during inflationary shocks would be the reaction of the media.  If people they trust as authority figures are on the same side as the government, it would likely be a different case than if the tide turned.  Unlike America, where the mainstream media can mouth off whatever and conservatives would still flock to gold.