‘Possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire,’ was Boris Johnson’s assessment of the proposal to cap bankers’ bonuses at 100 per cent of base salary, or 200 per cent with shareholders’ approval. This blunt exercise in market interference was tabled by a committee of MEPs led by a British Lib Dem, Sharon Bowles (perhaps in revenge for the fact that she didn’t win the Bank of England governorship, for which she applied) as a condition of agreeing a new set of bank capital reforms. With the support of all member states other than the one most affected — that’s us — and despite token resistance from George Osborne, it will now pass into EU law. And Mayor Boris must be right that it will drive business from London to rival centres, even if he’s wrong that one of them will be Zurich — the Swiss having just voted enthusiastically for a referendum proposal to impose their own strict controls on executive pay.
It will also, I suspect, drive bankers away from healthy transparency in matters of pay and back into the hands of the tax wizards who concocted all manner of offshore schemes (many later outlawed) for them in the 1990s. In a week when HSBC revealed it had paid 78 London staff more than £1 -million each, and António Horta--Osório of Lloyds collected a £1.5 million bonus despite the state-controlled business he runs losing £570 million, what’s clear is that these legislative shifts have not yet driven bankers to the realisation that the game is up.
But it surely is. Just as Sir Mervyn King said last year that we might be barely halfway through the financial crisis, so we are also still in an early phase of a radical reappraisal of the socioeconomic value of an industry that remains so arrogantly blind to its own failings. A 200 per cent bonus on top of a six-digit salary would be a colossal reward for any competent executive — but that legal maximum will be beyond reach of all but a handful of profit-generating stars once new capital rules have raised the cost of doing business, and shareholders demand a fairer share of diminished profits. The market will squeeze bankers’ compensation far more effectively in coming years than any legislative cap full of holes. And no politician anywhere will offer sympathy or relief.
Diocletian, let us recall, was also the emperor who launched the ‘Great Persecution’. That, I fear, is what the bankers have unleashed upon themselves — and it has only just begun.
Irrelevant no more
‘The brave might buy into Japan,’ Merryn Somerset Webb wrote in an Investment Special here in 2008, only to watch the Nikkei index of Japanese stocks spend much of the following five years in the doldrums. Like Merryn, I lived in Tokyo in younger days and have liked and admired the Japanese ever since, so I’m as glad as she is to see that long-term faith in Japan’s potential for recovery finally looks set to pay off. The Nikkei is up by a third since November but still offers ‘better bargains’ than other major markets, says Jonathan Davis on page 34, while Merryn herself declares (in MoneyWeek) that ‘Japan’s latest rally will last’. And the difference this time, she says, is ‘geopolitics’.
The best exposition I’ve come across of what that means is an essay titled ‘The Real Thing’, by a Tokyo-based hedge-fund manager, Alexander Kinmont of Milestone Asset Management. A decade ago, Kinmont (then an equity strategist at Morgan Stanley) wrote a much-read research note, ‘The Irrelevance of Japan’, which summed up the case for investor despair. But now he thinks ‘something “big” has changed’.
Part of the story is prime minister Shinzo Abe, who swept to power in December in a landslide for his Liberal Democratic party, offering to reflate the economy through money-printing and devaluation of the yen. But Abe’s victory may itself be a symptom of a deeper psychological shift demonstrated by the robust national response to Chinese claims over the disputed Sentaku Islands in the East China Sea. In short, China has overplayed its hand while Japan has rediscovered its mojo. And the US government, recognising afresh the need for a strong Japan as a regional counterweight, will support Abe’s recovery measures, possibly even to the extent of selling Japan cheap shale gas to replace diminished nuclear generating capacity.
The arrangement that underpinned Japan’s post-war ‘economic miracle’, of successive LDP governments working in close co-operation with Washington — the era that culminated, in my time there, in the ‘Ron and Yasu’ diplomatic love-in between President Reagan and prime minister Yasuhiro Nakasone — is set for a re-run. Having become ‘expendable’ when geopolitics changed as the Berlin Wall fell in late 1989 (coincidentally, Kinmont points out, just seven weeks before the Nikkei hit its all-time peak), Japan’s ‘period of strategic irrelevance appears to have come to a close’.
Time for a reassessment of the ‘inevitability’ of China’s rise to economic supremacy as well as of Japan’s decline? Shanghai stocks took a timely dive at the beginning of the week in response to indications of slowing growth and overheating real estate — while Tokyo continued to climb, boosted by a pledge from Haruhiko Kuroda, Shinzo Abe’s nominee for Bank of Japan governor, to pump more money into the economy and help exporters by weakening the yen.
I’m reminded of a recent dinner-table conversation in which the young man next to me introduced himself as a ‘fixed-income hedge-fund manager’. ‘So,’ I asked, perhaps a touch too aggressively, ‘you’ve been busy selling UK gilts short?’ He muttered something opaque about ‘adjusting my positions relative to other asset classes’ and turned away, evidently not wishing to be interrogated further — but then turned back and said with sharp emphasis, ‘I’ll tell you one thing for sure, I’m short China.’