Learning From Japan

Includes: DIA, EWJ, FXY, QQQ, SPY
by: Mike Stathis

I ran across an interesting story about how Japan is using a somewhat innovative approach to deal with its own symptoms of what will eventually be recorded in history books as the global depression.

The Japanese government is paying travel expenses (plus a little extra money), or about $3000 apiece for migrant workers who agree to return back to their homeland. They must agree never to come back to Japan for work. Critics in Japan have lashed out at the program calling it “inhumane” and “destructive” for the future economy. Maybe the Japanese government realizes just how bad things are going to get.

As bad as things are in the United States, they are even worse in Japan. With expectations of a productivity decline of over 6% for this year alone (more than twice the decline expected in the U.S.), Japanese officials realize that it’s time to take some drastic measures. So they’re willing to help preserve what jobs remain for Japanese citizens. That begs the question…why can’t Washington learn from the Japanese?

The arrogance of Washington to ignore previous lessons learned from Japan’s “lost decade” might explain the current approach taken by the U.S. Treasury in dealing with the insolvent banks. Then again, there are other possibilities.

In the early ‘90s, when Japan’s real estate and stock market bubble burst, this created massive problems for its banking system similar to what has recently happened in the United States. Rather than correct the problem, Japanese officials took the wrong measures. Part of the reason for these oversights was that they underestimated the severity of the crisis. They did not realize how much an imploding real estate market would devastate the banks. As a result, they made small gradual moves, all which were insufficient and misdirected. Ultimately this caused deflation and a 15-years annual decline in real estate prices.

Similar to recent measures taken by the Federal Reserve, Japan slashed interest rates to 0%. At the same time, rather than recapitalize the banks, they made inadequate cash infusions to the banks while passing several fiscal stimulus packages in order to buttress the economy. Sound familiar? Finally, they even tapped into private investors to bad the bad assets from the banks and manage it themselves. None of these measures worked. And I don’t see them working in America either.

In each case, U.S. officials have tried a piecemeal approach while insulating themselves from the real solution; nationalization of the banking system. Similar to Japan, if Washington does not soon nationalize the banks, taxpayers will lose the majority of funds already handed out.

As we now know, the most intense damage was done nearly ten years later during what is known as the Asian Financial Crisis of 1997. While the causes are not certain, most experts believe it began after Thailand removed its currency peg to the dollar. This led to widespread economic devastation in Southeast Asia, setting off a wave of bank failures, including in Japan. One thing I am certain of is that Alan Greenspan’s response to the crisis only made the dotcom bubble worse. In fact, it caused the bubble to burst in 2000.

Make no mistake, without nationalization, America’s banks will share a similar fate as those in Japan; bank failures, massive losses of taxpayer funds and a lost decade. In fact, things are likely to be far worse.

From 1992 to 2005, Japanese banks wrote off nearly $1 trillion USD, or about 19% of the annual GDP at the time. Already, U.S. banks have written off around $650 billion (sources vary) or about 5% of the trailing GDP. Although it’s almost impossible to say due to a variety of variables, in my estimation the total write-offs for U.S. banks will end up being at least $4 trillion before it’s all said and done. However, I would not be surprised to see that figure double. It all depends on many things. If by chance some miracle happens, the write-offs might be contained to $2.5 trillion, but no less; still about 19% of GDP (based on my mean estimates of GDP over the next few years).

Already, Washington has allowed changes to mark-to-market which could help lessen the write-offs in a number of ways. But one thing is certain. Nationalization of the banks is the only real solution. And the sooner Washington realizes that, the less damage will be done. You cannot cheat the system. No matter what additional schemes the Treasury and Fed devise, the damage will be borne by many. That’s a guarantee.

In my opinion, Washington’s economic “experts” have concluded that the only lesson worth learning from Japan is that protectionism must be avoided at all costs. The rational (I would imagine) is that the severity of Japan’s lost decade was somewhat moderated by increasing exports to the U.S., China and other nations.

The only problem is that the real mistakes made by Japan were how they dealt with the banks. As well, America doesn’t have much to export. In my opinion, Washington is using this as a front to protect the toxic free trade policies which only enrich corporate America and their wealthy shareholders; not you or I who might own 2000 shares of Unitedhealth (NYSE:UNH) or Exxon-Mobil (NYSE:XOM), but the families that own millions of shares.

How is it possible for Paulson, and now Geithner and Summers to repeat the same mistakes made by Japan? How stupid can they be? Perhaps it’s a matter of arrogance. Maybe it’s simply a matter of taking a “win at all costs” attitude for their banking friends.

Oh well, I suppose Washington won’t borrow Japan’s program of sending migrant workers home; or better yet expand upon the idea by actually enforcing federal immigration laws because America is much different than Japan. Japan’s government has placed its citizens as the top priority, while Washington’s top priority is corporate America.