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Japans lost decade of the 1990s

Page history last edited by Brian D Butler 13 years, 5 months ago

 

 

ANALYSIS

 

  1. "What happened to Japan was largely the result of using monetary policy after 1985 to offset the negative impact of the rising exchange rate on net exports."  Read more from Martin Wolf of FT.com here 
  2. "Japan was an unusual bank collapse. It happened despite excess savings in the system. This is really strange. Most bank collapses happen when there is a lending binge that drives excess or investment or consumption and with a current account deficit. (See for instance Korea – where there was excess investment or Argentina where there was excess consumption.).  Japanese banks always had (at least collectively) sufficient deposits. [See my post on 77 Bank to see just how much excess deposits they now have.].  But the Japanese banks lent very badly indeed. Part of this lending was to the "Zombie companies" but most was on property....read more from excellent blog posting from Bronte Capital: here

 

BACKGROUND:

In 1986, when Japan’s bulging current-account surplus was a huge source of tension with America, the Maekawa report, written by a panel of Japanese experts, preached the virtues of more time off as a means for workaholics to let their hair down and spend, spend, spend.

 

The country first mollified America and evened out its trade books by raising the value of the yen. But as the dollar slid, it reversed course and cut interest rates, which boosted spending on everything from golf-club memberships at home to splashy buildings in Manhattan. Cheaper credit had the effect of stoking the vast stockmarket and land bubble that popped with disastrous consequences in the 1990s and beyond.

 

read more from the Economist.com on "Rebalancing the world economy: Japan"

 

 

Origin:  Some booms started with liberalisation. Japan created a huge share and property bubble in the 1980s by relaxing its strict banking regulation. The banks fell over each other to lend money as they jostled for market share. Extra credit found its way into stock and property prices.

 

After the bursting of Japan’s asset bubble, the country’s economy grew by less than half a percent a year in real terms for a decade, and GDP ended up around 18 percent lower than it would have given its pre-crisis trend line.

 

Japan’s Nikkei 225 fell by 48 percent from peak to trough (December 29, 1989, to October 1, 1990) during the banking crisis, though the market has subsequently fallen still further; at the end of October 2008, it retained less than 20 percent of the peak value reached in 1999.

 

From Martin Wolf... http://www.ft.com/cms/s/0/d7ff9856-e191-11dd-afa0-0000779fd2ac.html

 

"It has long been argued that the US could not suffer like Japan. This is wrong. It is true the US has three advantages over Japan: the destruction of wealth in the collapse of the Japanese bubble was three times gross domestic product, while US losses will surely be far smaller; US non-financial companies do not appear grossly overindebted; and, despite efforts by opponents of marking assets to market, recognition of losses has come far sooner.

 

 

 

 

US economy

 

 

Japanese Disease

 

Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can't we be like Japan? And my answer is that it is possible, but the cost that Japan has paid has been high.

 

In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country?  Source:  John Mauldin Newsletter, October 16, 2009

 

 

 

Similarities between Japans lost decade and Americas current mess:

 

"Macroeconomically, the main parallel is the massive shift in private and government saving. Japan’s asset bust left a gaping hole in corporate balance-sheets. As firms spent years paying down debt, the economy had to be supported by a large and persistent increase in government borrowing (see chart). On average, Japan’s government has run a structural fiscal deficit of more than 5% of potential GDP every year since 1993."  read more from the Economist

 

 

Stephen Roach (Morgan Stanley) says.

 

"If the American economy were entering a standard cyclical downturn, there would be good reason to believe that a timely countercyclical stimulus like that devised by Washington would be effective. But this is not a standard cyclical downturn. It is a post-bubble recession.

 

The United States is now going through its second post-bubble downturn in seven years. Yet this one stands in sharp contrast to the post-bubble shakeout in the stock market during 2000 and 2001. Back then, there was a collapse in business capital spending, a sector that peaked at only 13 percent of real gross domestic product.

 

The current recession has been set off by the simultaneous bursting of property and credit bubbles. The unwinding of these excesses is likely to exact a lasting toll on both homebuilders and American consumers. Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago.

 

 

Stephen Roach, from Morgan Stanley has noted that Japan also had a double bursting of the real-estate market, and subsequently of the financial sector, which led to Japans lost decade of the 1990s.   If thats true, then this downturn could be long and painful.  It took Japan a decade to begin to grow again.

 

 

"Japan’s experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.

 

There are eerie similarities between the United States now and Japan then. The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.

 

Moreover, Japan’s central bank initially denied the perils caused by the bubbles. Similarly, it’s hard to forget the Fed’s blasé approach to the asset bubbles of the past decade, especially as the subprime mortgage crisis exploded last August.

 

In Japan, a banking crisis constricted lending for years. In the United States, a full-blown credit crisis could do the same.

 

The unwinding of excessive corporate indebtedness in Japan and a “keiretsu” culture of companies buying one another’s equity shares put extraordinary pressures on business spending. In America, an excess of household indebtedness could put equally serious and lasting restrictions on consumer spending."

 

The toughest, and potentially most relevant, lesson to take from Japan’s economy in the 1990s was that the interplay between financial and real economic bubbles causes serious damage. An equally lethal interplay between the bursting of housing and credit bubbles is now at work in the United States.

 

American authorities, especially Federal Reserve officials, harbor the mistaken belief that swift action can forestall a Japan-like collapse. The greater imperative is to avoid toxic asset bubbles in the first place. Steeped in denial and engulfed by election-year myopia, Washington remains oblivious of the dangers ahead.

 

see more:  here

 

 

 

 

 

 

led to the Asian Crises of 97?

Was the Asian crisis the result of Japanese savings fleeing their crisis...which flooded the region with credit?  I read this "Japanese savings fled their own bust and sloshed first into the Nordic countries and then into Asia, which suffered contagion in 1997."  source:  http://www.economist.com/printedition/displayStory.cfm?Story_ID=12957709#

 

 

 

 

How it "ended" - Liquidity splurge -

"Japan may have muddled through such scares before, most recently after a five-year splurge of liquidity unleashed by the BoJ between 2001-06."

 

 

 

 

 

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