Japan and the Financial Crisis: Déjà Vu?

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.

Comments

[Mad Hedge F...:]

It is for me. For me it’s déjà vu all over again. When I traded the Nikkei during the nineties, every market rally was capped by a predictable flood of new equity issuance by cash starved, undercapitalized Japanese banks. It sucked the life out of the market for a decade, confining it to a monotonous 14,000-20,000 range, until it finally dropped by half again after the dotcom bust. Sound familiar? This was while the Dow was going from 2,000 to 10,000. Now the tables are turned. Last month saw American banks soak the market with new equity on an unprecedented scale; Citibank (C) $58 billion, Bank of America (BAC) $25.9 billion, Morgan Stanley (MS) $6.8 billion, Goldman Sachs (GS) $5.8 billion, and JP Morgan (JPM) $5 billion. If the market edges higher, we will no doubt face more supply. I have no doubt that this will define the top end of a range in the Dow that we will have to live with for quite a long time. Volatilities will crash. Better to go trade China, Brazil, India, or any other country that has large cash surpluses and relatively healthy banks.

Jun 16 02:46 PM

[Drew Arnold:]

The US crisis is very similar, but the response is a polar opposite. Japan was WAY too overconfident and failed to recognize (or even be willing to recognize) it's problems for a very long time. While the US was overconfident on its way into the crisis, its response was much more significant and self-aware than that of Japan in the 90's.

Jun 19 10:14 AM

[Moon Kil Woong:]

The similarity as to the root is strikingly similar: an inflated housing market collapse, QE, and a belief that government rather than individuals and a free market can and should fix things. Rather than fixing things their government intervention put them in a permanent rut.

If QE can bankrupt a fiscally healthy government, destroy a vibrant and innovative economy, and encourage every badly run construction company and bank to cleave to the government for help to the point of trying to create whole cities in the ocean that no one wants or lives in think what it will do to us. Keeping the banks solvent didn't help Japan, it only dug a bigger grave in which to dump the economy into.

Our flirtation with the dark side of QE and the terrible waste and corruption it spawns has only begun. It's best if we wake up and decide we don't want to remain a victim to it any longer.

Jul 21 05:35 AM