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AIR shows are where the world’s defence giants show off. This year’s Farnborough Air Show, which ended on July 22nd, was no exception. The roar of the engines on Lockheed Martin’s F-35 stealth fighters overhead drowned out many a sales pitch on the ground. But pride of place at Raytheon’s display area went not to a weapon but to a “cyber dome”—a slick 3D cinema showing how hacking works. Its message was clear: governments and firms cannot afford to ignore cyber-attacks. Nor, indeed, can defence firms themselves.

The size of the military and civil cyber-security market is an obvious reason why—it grew from $3.5bn in 2004 to $120bn in 2017. The market will expand by an annual 12-15% in the next three years, or twice as fast as global defence-equipment budgets, reckons Cybersecurity Ventures, a research firm. Spurred on by Russian internet attacks against the West, defence departments are considering spending far more on cyber-defences. In America, Congress is emphasising the importance of cyber-security; Britain’s government reportedly plans to shift some of the Ministry of Defence’s budget towards repelling cyber-threats. Private-sector companies routinely put cyber-security among their top worries.

Defence firms are no strangers to the market. They have had to fight off cyber-assaults on their own weapons and IT systems since the internet took off in the 1990s. About a decade ago they started to use this expertise to sell services to governments and private companies.

Yet the industry has struggled. Accustomed to dealing with huge defence departments with long procurement cycles, firms lacked experience in appealing to picky private firms with shorter time horizons. Many underestimated the level of competition in the industry. Only half a dozen firms assemble military jets whereas over 3,000 firms offer commercial cyber-security services. Defence companies then compounded this error by concentrating on making software that puts walls around systems to protect against attacks, which tech firms are better at.

Some firms chose to exit the market, bolstered by a booming business for conventional weapons; global military budgets this year will reach a new post-cold war high, reckons IHS Markit, a research firm. In 2015 Boeing sold off Narus, a software company, to Symantec, a rival tech firm. The same year General Dynamics sold its Fidelis commercial-cyber arm to a private-equity company.

Now, however, the market is shifting in their favour. Demand is rising for cyber-security services in which defence firms have more of an edge, from the active identification of threats to providing executives with strategies about how to manage the fallout from attacks. It is also becoming easier for them to leverage their historical expertise in military intelligence, now that both governments and companies are suffering similar sorts of cyber-attacks.

Firms are going back in. In April General Dynamics bought CSRA, a cyber-security specialist, for $9.7bn, in an effort to become the American government’s largest IT-services provider. Lockheed has thrown money at startups including Cybereason, a specialist in AI, as has L3 Technologies, a rapidly-growing American defence group.

Weapons companies reckon that their main customers, defence departments, see commercial cyber-security businesses as a type of credential. American officials have threatened to stop awarding contracts to firms whose weapons are deemed vulnerable to cyber-attacks. That came after a series of embarrassing hacks, including the theft early this year by China of American plans for a supersonic anti-ship missile from a naval contractor. Without its Applied Intelligence division, advisers to BAE Systems, Europe’s largest defence group, say it would have “serious trouble” selling further planes and missiles to Saudi Arabia, its main export customer.

And although they are currently making hay from hardware, defence giants worry that demand will fall after a two-year budget boost in America expires in 2020. They want to build cyber-security businesses to diversify while the “sun is shining”, says Frank Ford of Bain & Company, a consultancy. Executives still remember the 1990s, when military budgets plunged after the end of the cold war and many defence firms were forced to shut as they had little else to do. Cyber-security looks like being a lot less volatile.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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