Japan and its Economy Did Not Have Secret to Everlasting Success

Reddit

The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114 [then continued to $1,122.85 per ounce in Asia].

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing; the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see, in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ’80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights. For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success. And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had. Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall. The stock market crashed in Tokyo in 1989. The Japanese economy entered a recession. At first, the experts believed it was temporary. They urged investors to take advantage of the opportunity to buy into Japan, Inc. at record low prices. They thought Japanese industry was unstoppable…unbeatable. It would recover in no time, they said.

But Japan, Inc. didn’t recover. Instead, it went into a long, drawn-out recession that lasted year after year…with on-again, off again deflation…and several stock market rallies. Each time stocks rallied, they fell again. Each time the economy began to grow…along came another setback. This continued for the next 20 years…until March of this year…when Tokyo stocks hit their lowest point for the whole bear market. A generation of investors had been nearly wiped out. Over two generations they had made nothing. Trillions worth of wealth had been erased.

What did the Japanese authorities do during these last two decades? They fought the correction every step of the way, with the boldest attempt at fiscal and monetary stimulus every undertaken up to that point. Interest rates came down to effectively zero. And government spending soared, creating the largest deficits in Japanese history. Now, Japan’s national debt approaches 200% of GDP – a peacetime record. If it continues to grow at this rate, it will hit 300% of GDP in just a few more years.

Sound familiar? It should. The key US interest rate is now effectively zero. The Fed says it will leave it there for “as long as it takes.” And deficits have reached staggering levels – 13% of GDP. At this rate, the US debt/GDP ratio will hit 100% in just a few years. And if it continues, US debt/GDP will reach 200% not long after – as recession- reduced tax revenues meet stimulus-increased outlays.

But wait…the feds say they won’t let it happen. They’ll turn this thing around. The economy will begin to grow. Tax revenues will rise. Prices will go up.

Hey…that’s just what the Japanese said!

So far, the US is doing almost exactly what the Japanese did…propping up zombie companies and stimulating the economy as best it can.

But if it does the same thing the Japanese did, won’t the US get the same results the Japanese got?

Here is where it gets interesting. Because the US economy is not exactly like the Japanese economy. Japan had high savings…and a positive trade balance. It could run up huge government debts and “owe it to itself.” It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds…or selling them suddenly.

America’s government debt is different. The US doesn’t save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America’s ability or willingness to repay its debts, they’ll drop the dollar like an annoying girlfriend. And when they do, the whole global monetary system will come crashing down.

But suppose savings rates go up in America – to, say, 10% of GDP, like they were before the bubble years. That would make $1.4 trillion of savings available to finance the feds’ deficits. And suppose the slump continues…as we think it will, with another big scare in the investment markets. People will seek safety in…yes, you guessed it…US bonds. This will take the pressure off the dollar and permit the US to finance its countercyclical spending without depending heavily on foreigners. The recession/depression will be annoying…but not insufferable. And Bernanke will figure he has more to lose by undermining the dollar than to gain from it. In that case, the Japan- like slump could go on for many years – just as it has in Japan!

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

Latest posts by Bill Bonner (see all)

Reddit

Comments

  1. Prophetic article Bill: I have a hypothesis.
    NB: Japan is probably the most intellectually focused nation ever and if it cannot pull out of a economic demise after 20 years, the economic models we are using are wrong.

    THEORY: Japan can never break away from its present economic sito becuase it has reached the limit of its manufacturing colonialism (out source) and has no land with resources to control. This brings us to the energy/materials per capita ratio which is extremely high, regardless of its overseas cash cow manufacturing and resources.

    The Japanese Govt is having to extend its liabilities dipping into cash reserves to keep the country afloat, lowing wages to below functional consumption cannot be done readily.

    NB: Aus on the other hand has a low energy/material per capita ratio but essentially practices wide spread divestiture of its intellectual capacities ie Aus chooses to maintain non competitiveness because it (the outcome regardless of plebiscite to determine otherwise) believes, I think foolishly, that it can make global socialism a feature of an internal egalitarian state. In time this will eliminate national sovereignty all together. In short we can see that Aus is the most intellectually unfocused nation in the Western World, and does so by choice. In effect a self fulfilling terra nullius – Aus cannot domesticate its economy to a level of self sufficiency eg it currently digs its crops into the ground and imports food.

    TEST HYPOTHESES: How could such an inept Nation such as Aus survive so well in the GEC? I believe it is low e/m per capita ratio.

    NB China is currently trying to increase its energy/materials par capita ratio but will run into the problem of the taking over of Aus resources by having to pay too much over heads. Aus defaulting on loans may rectify a solution, but the transfer of energy/material to China would be still too inefficient. China has a lower intellectual focus than Japan and the e/m per capita values are higher than Japan’s.

    NB The energy/material resource investment in China (and Japan) is so enormous that the World will suffer an enormous loss of economic output if it were to be unutilised. As well there is current industrial integration on an international scale.

    Its pointless going into to detail of the postulate of India we can assume the worst possible outcome of the e/m ratio and intellectual capacitance – it suffers a cultural dread that requires communistic type revolution……….

    HYPOTHESIS: China will follow Japan in a similar economic pattern pre WW2, HS Dent’s book ‘The Great Depression Ahead’ exemplifies the excessive traditional economic modelling . Energy/materials per capita value is an irrefutable logic. Both Japan and China need land resources.

    Australia is the only continent that is able to accommodate economic expansion with insitu manufacturing that can keep the global energy/material per capita costs down. Aus cannot domesticate its economy to be self sufficient it has no food security policy it is truly terra nullius.

    Aus would be more competitive if it were placed into a more globally nominal energy/material par capita ratio, ie a smaller area. It’s current domestic policies are inept and will impoverish the World with its hogging and enforcement of high cost energy/materials – the lowering of its intellectual capacity is disturbing, the World’s subsiding of $12000/ann for welfare recipients to go to the beach is immoral. Inevitably however we will need to scale down the world population.

    The World is running out of chances to rectify its economic potentials, a more scientific approach to sustainability is required, the economic modelling is available if only its leaders choose to use them.

    tar and feathers
    November 15, 2009
    Reply
  2. Correction the Aus em ratio is very high and the China and Japan exceedingly low….sorry about that

    tar and feathers
    November 15, 2009
    Reply
  3. “a more scientific approach to sustainability is required” .. that’s a phrase that was used by almost every totalitarian regime that I can think of.

    Reply
  4. “NB: Japan is probably the most intellectually focused nation ever and if it cannot pull out of a economic demise after 20 years, the economic models we are using are wrong.”
    マジで??!!!
    Japan is the most Japanese nation ever, beyond that I wouldn’t make to many claims. They gave strengths and weaknesses, these play put via comparative advantage, they have industries they are world leaders at (semiconductor manufacturing equipment), industries they are complete non players in (semiconductor design software). More specifically they lead in manufacturing productivty, but suck at white collar productivity and service productivity. This is hard to escape from due to a monoculture. I suspect this has more to do with stagnation.

    Reply
  5. Phil, that’s fair comment about Japan being the follower of technology rather than the original inovator(s). This is due to its cultural regimentation, similar with China. But there is a national qualitative approach that Japan takes in organising productivity….much more than Aus white collar gurus who cannot train , give adequate health care, have affordable housing apparently Aus is running out of room ???, get workers (white & blue collar) to work on time – Aus is an abysmal performer and has squandered its wealth and it holds the world to energy materials ransom and will continues its spiral into intellectual incapacity.

    But the Japanese are really remarkable achievers and deserve access to improve human prosperity – yea and dropping the slaughter of whales and relinquishing its claim to other lands. One of the tests to the hypothesis is that Japan will never return to its former prosperity and that China will follow suit.

    tar and feathers
    November 15, 2009
    Reply
  6. tar and feathers, while I agree that there is a lot of sloppiness around the traps in Australia, I was wondering how you formed your opinions. There’s a lot wrong with how Australia is run, but it’s overall not bad from what I’ve seen in my travels. See:

    Australians are still working long hours: http://www.nationmaster.com/graph/lab_hou_wor-labor-hours-worked

    Australian health standings are good to excellent: http://www.photius.com/rankings/healthy_life_table2.html

    Australian education is probably still good: http://www.smh.com.au/articles/2002/11/26/1038274291978.html (though I have read it is falling behind gradually)

    And of course on other more dodgy measures Australia has had a recent thumbs up: http://www.manmonthly.com.au/Article/Australias-world-ranking-improves/497680.aspx

    So, how would any other culture manage Australia in a way that was better, not just different? I wonder.

    Reply
  7. I think Japan is simply one of those economies that is often misunderstood. When the global economic crisis hit there was not a lot an export focused nation like Japan could do but take the hit and wait for the storm to pass. Remember unemployment in Japan has already peaked at less than 6% and is now back to 5.3%..although this is still high by Japanese standards. (of course it helps that they can simply turn off thousands of robots when demand slumps)

    I think over the next decade or so we will see why keeping a focus on R&D pays off and I suspect the Japanese economy will do quite well. At least I hope so, that is why I live here :)

    As for the whales, well the Japanese wonder why we slaughter kangaroos..so I guess what is acceptable depends on your point of reference.

    Greg Atkinson
    November 16, 2009
    Reply
  8. let’s not forget the role that social security plays in making australia politically stable, with a manageable crime rate, or the rules and regulations that australians are expected to abide by (difficult when desperately poor). the lack of a cast system is also an advantage. I get sick of the attitudes towards the unemployed by those who are not so afflicted (no doubt through access to capital, jobs for the boys etc etc).
    not forgetting the need for capitalism to have a measure of unemployment to keep wages down, or the laziness in australian business to train and develop human capital (rather than scimming off skilled labour from overseas, often from countries with dire need of their skills). all day at the beach? ha, ever heard of work for the dole or “earn or burn”? ever tried living on $220 a week? the way carbon restrictions will probably go, we’ll all be (or need to be) on about that rate, globally (4 tonnes CO2 per capita)… sorry for the rant, can’t help it. australia is a bit lazy intellectually, and IMO, morally.

    Reply
  9. Dan:
    The Centre of Full Employment http://e1.newcastle.edu.au/coffee/ – the social and economic harm to not providing full employment…..the point is that Aus has given its manufacturing jobs to other nations and left us defenceless http://www.theaustralian.com.au/news/nation/military-not-ready-for-war/story-e6frg6nf-1225697610494

    Our Health? I think most people agree its ordinary to bad http://www.abc.net.au/news/stories/2009/09/11/2682882.htm

    Education? The Australian education system has been hijacked by social globalists under politico correct agenda http://www.dailytelegraph.com.au/news/hsc-religious-question-unfair-students-say/story-e6freuy9-1225790627659 – recent question in HSC on Muslim religion was not in curriculum

    The Aus with all its resources should be the jewel in International society it should simply be up with leaders the World in all aspects of Industry, manufacturing, health, education…..we can’t even provide proper infrastructure in our own export interests, the ports and railways are a joke.

    The last web site you provided re: ‘manufacturers monthly’ has a vote link “Do you think the federal government should be more agressive in protecting Australia’s manufacturing industry?” the yes vote was 85% the “OK as is” was 6% and “no” to do bugger all was 6%

    Dan this took less than 10 min to find this info:

    Your last question:”how would any other culture manage Australia in a way that was better, not just different?” – Any country that has a better enterprising approach and has better industry leadership. BTW I have no problem with Govt owning private enterprise (non civil) for the people, Govt should operate private enterprises type business….Its obvious that Aus cannot utilise the Australian continent – we have an irrational immigration programme that has us becoming a refugee nation with people with serious health problems re terra nullius. Aus is not geared to performance other than sport.

    The point is that the World needs a new stimulus and I think that many difficult socio-eco-political problems would be solved with Japan and China taking over the bulk of the Australian continent…we need to maintain the Aus Constitution…..we are destroying our natural diversity now…..the Australian continent could become a power house with an economic block with China and Japan…eg we could terra form the interior of Australia with a massive inland salt water and fresh water enclosureS (seas in say a quadrant configuration) pumped via a tunnel from the ocean to one quadrant then desalinated to suit to other quadrants – this would change the weather pattern (approx 400km3 of water = 3mm of ocean). To this we could set the energy/material per capita ratio standard to control world population.

    This would work Dan. We need to learn how to colonise planets and our own moon by terra forming. The Sahara is another area that needs terra forming – Africa needs to get off the welfare train and help itself in a positive way. [markets markets markets]

    Japan non recovery is the best test of hypothesis.

    tar and feathers
    November 16, 2009
    Reply
  10. correction to above – Govt should NOT operate private enterprise type businesses

    tar and feathers
    November 16, 2009
    Reply
  11. By the way I believe this article by Gregory Clark is a lot more on the money about Japan than Bill Bonner’s article. http://www.shareswatch.com.au/blog/japan/economic-lessons-from-japan/

    I enjoy Bill’s work but when it comes to Japan I can tell he hasn’t spent much time in the country or really understands the basic behind Japan Inc. I think most Americans just can’t get over the fact that Toyota can outperform U.S car makers in their own backyard and that Japan Inc continues to expand across the globe.

    Greg Atkinson
    November 16, 2009
    Reply
  12. The article Greg is big Govt stimulus and pro Keynesian – I disagree its not going to work and it didn’t work in Japan in the 20 years….200% of GDP Govt Debt at present…ok something is not working. But the Japanese are smart and if they can solve their economic corundum which stated to plague the World – that is precisely my point to wait and see. Check out Dr Faber in DR http://www.dailyreckoning.com.au/debasing-currency/2009/11/12/

    BTW: When the US Govt Legislated to bring in fuel efficiency the US auto industry employed lawyers. With Japanese Legislation the Japanese auto industry employed engineers.

    tar and feathers
    November 16, 2009
    Reply
  13. tar the thing that keeps me optimistic about the Japanese economy is that even when times were tough they kept investing in R&D. In every major Japanese city you will find government backed R&D labs, thriving research centres at universities and labs set up by the private sector. That’s why we are likely to see a lot of “green energy” solutions in Oz having been developed in Japan and sadly not the other way around.

    But economists have trouble understanding that the Japanese economy has been shifting from “Made in Japan” to “Developed in Japan” for more than a decade. Also we all need to stop being obsessed with GDP growth and look at broader measures like GNP etc. A thriving private prison sector contributes to GDP growth, but is that really something we should be happy about?

    Greg Atkinson
    November 17, 2009
    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au