In many ways, the U.S. recession of 2008-2009 resembles Japan’s own economic debacle in the 90s and beyond. An overly confident national mood, appreciating asset prices, coupled with a ballooning real estate market and a heavily indebted corporate sector were the triggers of the long slump and the decades long bear market in Japan in the 90s. A look at the long-term chart of the Nikkei is a good indication of how bad it could get for the world and the US in the coming years. Rallies that lasted for years, declarations of bull markets did not manage to color the pale picture of the underlying bear market which has been ongoing for about two decades.
Is Japan in any better shape in this crisis? Yes and no. Japan’s corporate culture, and its sense of invincibility had a severe beating and a reality check once the bubble of the 80s burst. But as usual in a capitalist system, this has also allowed Japanese firms to adopt some aspects of the ruthless Western style of management, ensuring a more dynamic environment where the principle of survival of the fittest is applied with greater vigor.
The Japanese political structure, in spite of its inefficiency and lack of will, has been trying to heal some of the more serious shortcomings of the economic and political infrastructure of the nation that lead to such illnesses as nepotism, factionalism, and cronyism. So far success has been elusive, but the identification of the problem and the recognition of the need for a solution are steps in the right direction, though minuscule and shameful, given how long these issues have been plaguing the development of the country.
On the adverse side, a huge public deficit, an aging population, a political scene that is in total disarray, competition with China in the export sector, a consumer sector which is in a deflation-induced stupor, and a current account surplus that has been shrinking for 14 consecutive months are signs of what could lie in store for Japan in the coming years. The Japanese banking system has not been hurt as severely as its Western counterparts. But if the recent contraction in the global economy sustains its power into the coming years, and the new found thriftiness of the American consumer translates into a permanently smaller market for Japanese products, it is difficult to believe that the troubles of the Japanese financial sector are anywhere near being over. While the massive savings of the Japanese people alleviate the severity of the worst case scenario, it also implies that the so-long anticipated revival of consumer spending in Japan and the end of deflation are still a long way away.
Ultimately, the Japanese story is a good lesson for all those who tie their hopes to government intervention in the markets, and expect that the printing of money will automatically translate to inflated assets, rising prices, and higher consumer spending. Japan has applied the most extreme teachings of this paradigm, yet it has failed. There is no reason to think that the rest of the world can succeed by doing the same in the next few years. Moreover, Japan’s experience questions the validity of the relationship between fiscal irresponsibility and currency depreciation. Those who predict the rapid demise of the US dollar may well reconsider their opinion on the basis of Japan’s lost decades.