Getting Japan Wrong....

In my Money Week column this week, I've been looking at the 20th anniversary of the Japanese crash...and suggesting we learnt all the wrong lessons from it....

As anniversary’s go, it was hardly one anyone would want to celebrate very much. Twenty years ago last week, on December 29th, 1989, to be precise, Japan’s Nikkei index reached its all time peak 38,957. From there, it spiralled into an eternal collapse from which it still shows very little sign of recovering.
It is the mother-of-all-bear markets. Yet it is also significant for far more people than the few unfortunates who bought into the Tokyo market as the 1980s closed. Economic policy making is dominated by the fear of repeating Japan’s two decades of stagnation. The policies Japan forged to combat it – printing money, and massive government deficits – have been followed by the US, the UK, and most of Europe.
And yet, now that we have some perspective on the collapse of the Nikkei, it is clear that we learned all the wrong lessons from the bursting of the Japanese bubble. Printing money that didn’t exist and endless rounds of extra government spending haven’t worked for Japan. They merely led the country into bankruptcy. The same policies aren’t likely to work out much more happily for the rest of us.
If it was a marriage, the Japanese bear market would now be marking its China anniversary. During the 1970s and 1980s, the Japanese economy and stock market was one of the strongest in the world. From 11,000 in 1985, the Nikkei index nearly quadrupled over the next four years. Property prices went even crazier. At one point, the value of all the land in Japan was worth four times as much as the whole of the United States, even though the US is four times the size. (Property prices, since you ask, are still 60% below their peak levels).
Like all bubbles, the Japanese boom took a kernel of truth, and stretched it to absurdity. The country was on a roll. Its auto and electronics industries were crushing the bloated dinosaurs of Europe and the US. It was emerging as the richest, most technologically advanced society in the world. It was no surprise that everyone wanted a piece of the action. Prices massively overshot themselves – as prices in a free market usually do. A collapse of the bubble was inevitable at some point.
The government and the Bank of Japan were initially fairly relaxed. But once it became clear that growth was taking a hit, and the banking system was badly injured, two policies were developed in response. Interest rates were slashed, and when that didn’t work, it was followed up with a novel policy called ‘quantitative easing’. And the government ran up huge deficits to stimulate demand.
The world’s central bankers have looked at the Japanese experience and drawn a simple lesson. Monetary and fiscal policy “should have become even more aggressive in an effort to prevent a deflationary slump,” argued a key paper on the fall-out from the Nikkei’s collapse published by the US Federal Reserve. In effect, the lesson policy-makers have drawn is that Japan came up with the right medicine, but not quickly enough. The Japanese experience inspired their response to the credit crunch. We’re doing what they did more than a decade ago, only more aggressively.
There is just one snag, however. In Japan, it didn’t work.
Two decades on from the crash, the Nikkei still hasn’t recovered. In the depths of the crisis last year, the index went down to almost 7,000, and is still hovering around 10,000. The economy splutters on life support. The banking system refuses to spark back into life. The deficits remain huge.
In truth, we learned the wrong lesson from Japan.
There are two important points.
First, the cure has been worse than the disease.
Japan has landed itself with a potentially massive debt crisis. The budget deficit is running at 10.5% of GDP, one of the highest in the world (although not, of course, as high as Britain’s). According to International Monetary Fund, government debt will hit 246% of GDP by 2014, compared with 108% for the US. The markets are looking at Japan, and wondering if that kind of debt will be affordable. The possibility of default is already being discussed.
Next, the Japanese were being unrealistic in expecting to get back to the growth levels of the 1970s and 1980s. For much of the post-war period, Japan was a young, smart country, playing catch-up with the West. By 1989, its companies couldn’t play catch-up with anyone. They were already world leaders, whether it was on design, technology or manufacturing savvy. Growth was always going to be a lot harder.
On top of that, Japan was rapidly aging. More than 20% of the Japanese are already over 65. Since 2006, the country’s population has been steadily shrinking, and over the next decade will fall by 3.2% from its current 127 million, according to government projections. In the light of that, Japanese growth wasn’t all that bad. Between 1991 and 2000 it grew at an average rate of 1.5% a year, which was about the same as France and Italy. Between 2004 and 2008 it grew at more than 2% each year. Japanese companies continued to be some of the most formidable in the world, and its designers and entrepreneurs as brilliant as ever. Take a look at the number of Toyotas and Nissans on the roads, the Nintendos in every satchel, and the Uniqlos in every shopping mall. You can perfectly plausibly argue the Japanese economy has been doing fine for the last 20 years.
In effect, Japan should have accepted that the excesses of the 1980s bubble had to be purged. And that an aging, advanced society was not going to be capable of rapid growth. All that government spending did little to revive the economy. But it has bankrupted the country, and may create an even worse crisis some time in the coming decade.
It should be going into an era of an aging, declining population, with government finances in good shape. And it should have accepted that its days of rapid growth are behind it. At best, the policies of printing money, and massive deficits, have been irrelevant. At worst, they are storing up problems for the future. And the real tragedy is that we seem intent on repeating their mistakes – when we could have been learning from them.