We'll save that amazing graph (actually, there are two of them) for last, it's all about Japan, and what really happened during these supposedly lost decades.
While many speak of a lost decade, or even lost decades, there is really little that warrant such a description. In fact, one can make quite a convincing case for arguing that what Japan went through is nothing less than a sort of miracle. It suffered a 'Great Depression' type shock, without suffering anything even remotely resembling a Great Depression. In fact, it hardly suffered a recession at all.
Japan is a very interesting economic laboratory. Its experience has been used (and misused) by economist with very different, often opposing views:
- Those that argue it's a prime example of the wasteful nature of a fiscal stimulus
- Those that argue Japan shows us what is in stall for the US, a balance sheet recession, deleverage, low growth, perhaps even deflation, or the worst-case outcome, a debt-deflationary spiral downwards
- Those that argue public debt is irrelevant (pointing out Japan's record low interest rates in the face of a public debt exceeding 200% of GDP)
We're fairly sure we're forgetting some positions, but this will do for the moment.
There can be little doubt about what happened to Japan. In the late 1980s, it was on its way toward world economic dominance, at least if you believed the hype from business books you can buy at airports. Even the Japanese seemed to think so. In fact, what happened was that the mother of all asset bubbles was forming that took land, property, and stock prices to truly ridiculous values.
The charts (apart from the last two, those amazing graphs) are from slides from an October 2008 presentation by Richard Koo from Nomura. The bubble was basically self-inflating, as people took margin on stocks to buy land or property, and vice-versa. Then the bubble burst. To give you some perspective, the Nikkei topped at 38,900 on Christmas Eve 1989. More than 20 years later and it is still lingering at less than a quarter of that value. Go figure.
Japan, in short, suffered from huge asset price deflation from the 1990s onwards, and policy-making was slow to react. The asset price deflation led to a wealth destruction of epic proportions, land and equity prices fell some 80%, property prices only a little less.
And this wasn't all. Banks, which play a central role in the Japanese economy, were badly hurt by the melting of asset prices which served as collateral for loans (and by the stock market crash themselves, as banks used to have large equity holdings as a form of relational contract with partners from the same Keiretsu).
The Scale (And Non-Scale) Of The Disaster
There can be little doubt that the scale of the asset price crash and resulting wealth destruction was as big as that plaguing the Western world from 1929 onwards. What's more, because capital markets are relatively underdeveloped and Japanese prefer a type of relational contracts that foster long-term relationships, banks take on a central role in capital allocation.
Since the bad debts were swept under the carpet, banks couldn't resort to lending on anywhere near their previous scale, and so its fair to say that the Japanese economy was crippled by a shock at least of the same magnitude as the Great Depression, then compounded by the inaction of banks to deal with bad debt and the centrality of banks in financing business.
However, this is what happened:
This is simply one of the most amazing graphs in economic history -- ever.
If you consider the economic shock that Japan endured, and the way banks were crippled by bad debts and their centrality in financing business, it really is stunning that Japan never really experienced anything like the Great Depression. Add in a shrinking and rapidly aging population and the mystery becomes even bigger.
Let that sink in for a moment. While the evidence is undeniable that Japan suffered a Great Depression-type shock (or even worse), it didn't experience anything even remotely close to a Great Depression at all.
In fact, in terms like unemployment and GDP per person (arguably the most important economic statistics of a country), it was even able to perform better than it's major rivals suffering no such shock, at least not until 2008, whilst the Japanese shock occurred in 1990.
The pleasant lesson from this is that apparently, it is possible to experience a great financial shock, on a par or worse as that of the 1930s, without suffering anything close to a Great Depression.
I plan to write a follow-up post, in which we'll have a look at what the Japanese did to achieve this remarkable state of affairs, and whether we in the West (experiencing a financial shock of similar magnitude) can learn from this experience.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.