6 ms·

Twenty years on Japan is still paying its bubble-era bills

52 points by pg 17y ago

cwan 17y ago
Japan never actually dealt with the bust - and instead of taking the short term hit, they spread it over two decades. This was the problem - not the loss of confidence - which is an effect rather than the cause of the current malaise. When asset prices ultimately collapsed following the bubble, the government chose to prop up zombie banks instead of writing down grossly overvalued assets and restructuring debts - an issue that I worry about myself in the US though I think (and hope) American policymakers are wary of similar consequences. This goes back a bit to the debate over whether or not it's possible to have economic growth without dynamism. That yes, you do have booms but you also have busts but that the net benefits of the booms (in productivity and innovation) far outweigh the consequences of any bust. Governments who attempt to dampen busts (e.g. minimum wage, stimulus, propping up businesses that should otherwise die off) as a corollary also tend to dampen recovery and growth (e.g. resulting higher interest rates, slower hiring, stagnant growth of new businesses as zombie firms squeeze resources that would have otherwise been reallocated).
- stcredzero 17y ago
  It's often been noted that organized crime had a significant part in the current Japanese malaise. They were part of the reason for the ease with which bad loans could be made again and again. It seems likely that they were instrumental in much of the corruption. Also note that the leadership of the Yakuza is very politically conservative. Putting the brakes on economic development would also serve to slow down social and cultural change, as well as producing a climate generally friendlier to extreme right-wing politics.
- kingkongreveng_ 17y ago
  You can boil much of the Japanese bubble and persistent malaise down to pervasive fraudulent accounting. Fictitious book values and profits were and are everywhere. I dare say it's more common to Asian cultures than Western, as the 1997 crisis and current practices in China indicate. The moves in the US to weaken mark to market accounting rules to paper over weakness give great pause.
  - cwan 17y ago
    The problems in mark to market accounting wasn't so much in the accounting itself which generally should prove irrelevant given that the disclosure ends up being in the notes. The problem is because of regulatory accounting which requires that you need a certain threshold of regulatory capital - and the writedowns (even on bonds that companies intended to hold for their full maturity) meant that they were immediately undercapitalized or overcapitalized based on the whims of the market - an almost perfect storm at the time because these were relatively new regs. Granted, you could make the argument that these banks should have had greater reserves, but it is also useful and relevant to note that many of these banks may not have failed if they were not forced to sell of some of these assets at their lows as a result of regulatory requirements that did not exist only a year or two earlier (I forget the date).
deleted 17y ago
[deleted]
pheon 17y ago
why do people expect japan to rebound at all? with a severely aging population that is highly xenophobic compounded by deflation creating at best a flat to negative domestic consumption. This results in any economic growth being highly export dependent and has been for the last 10+ years. so.. a double blow, the great recession and the new decade of retirement, its a slow fade to #4 or #5 in world GDP.
- nostrademons 17y ago
  Keynes would agree with you...in the General Theory, his argument was that the "natural" state of the economy was a liquidity trap. Rising productivity results in an increase in aggregate supply, which results in persistent deflation, which encourages people to hold money instead of investing it, which results in a cap on that productivity. IIRC, he even suggested that Europe's long period of stagnation during the Dark Ages was because real interest rates were so high that rational entrepreneurs would never invest in new technology, because there was no conceivable way that they could generate a positive return on capital. And that the pyramids were ancient Egypt's solution to the problem of Keynesian stimulus (i.e. nobody was investing, so they built the pyramids to forcibly confiscate money through taxes and then distribute it to workers who would actually spend it). It makes me wonder what we're in for over the next 10 years. I don't really believe the "permanently stuck in a deflationary trap" theory - there's too much evidence against it. But I think the normal way countries get out of it is through war, which isn't terribly rosy either. In addition to the direct Keynesian stimulus, it also encourages rapid technological development, which opens up new markets that then become fertile ground for investment after the war.
  - loganfrederick 17y ago
    Do you know of any evidence against the deflationary trap off the top of your head? I don't disagree with your comment. I'd like to read a good article or paper explaining/disproving the deflationary trap.
    - nazgulnarsil 17y ago
loganfrederick 17y ago
The user cwan nailed the general failures of Japan's economic policy in the 90s, although the root of the problems extends farther back in time than even the Economist article covers. Back in the 70s, Japan's rise as a world economic power was fueled by government loans to private industry, allowing banks to fund abnormally large investments in industries, specifically manufacturing and technology, which helped support the rise of the global Japanese brands (Honda, Sony, etc). These same funds also helped inflate the massive real estate bubble the article briefly covers by selling the concept of the limited real estate space in Japan. What investors in Japanese real estate failed to realize is that even though there is a limited space in Japan, there is an unlimited price that a given piece of land may be valued at but a limited price that it can be intrinsically worth compared to the value of all other assets (hence the overinflated valuations of the properties). For a long time (70s and 80s), Japanese companies made solid progress in commanding global sectors, and their auto companies still do. However, the loans became so large and the earnings generated by the firms eventually declined to levels where the loan payments could not be made. The subsequent bank write-offs on all assets were the cause and/or effect (really a self-perpetuating vicious cycle). I cover these to give a positive spin on the United States situation. While the government has made a number of mistakes in regulating the banking industry and partially inflating the housing sector, it has not tried to directly inflate the economy to the scale the Japanese government did in the 70s. The United States government is propping up some American industries, but again, not to the extent of the Japanese government in the 90s. If that were the case, they absolutely would not have let Lehman Brothers fail. The government is in a tough position, trying to prevent political and economic chaos while allowing markets to reach their own equilibriums. For anyone who fears the China may be catching the United States economy, there is a good amount of evidence that China may be suffering the same syndrome Japan had in the 70s (building its economy based on government money). China will likely deal with the problem more efficiently once a bust occurs, but it does mean that China could be less of a threat than many suspect, assuming the United States is able to innovate at a reasonable rate. Here is a decent article/example of what I am talking about with China: http://www.bloggingstocks.com/2009/09/09/petrochinas-sugar-daddy-gets-30-billion-for-takeovers/ http://www.bloggingstocks.com/2009/09/09/petrochinas-sugar-d...
- nostrademons 17y ago
InclinedPlane 17y ago
The real kicker? The US has been using Japanese methods to try to dig itself out of the most recent recession. Even though these methods have already proven to be ineffective we haven't stopped using them.
hga 17y ago
A few semi-random observations: Japan's fertility rate is in the "lowest of the low", a rate from which no other society has ever recovered. You can plot it out so that it's projected there will be no Japanese left by the end of the next? century, but a gentle "will the last person please turn out the lights" scenario is extremely unlikely in such a rough neighborhood, where so many of the neighbors have serious grudges from 20th century Imperial Japan (at the time of the atomic bombings, the monthly death toll of the conquered people was in the low six figures; they killed 250K Chinese just trying to find one Doolittle crew, etc. etc. etc. etc.). All that money invested in the Postal Savings System is, as far as I know, gone. As the article noted, it's invested in "safe" government bonds, i.e. the money has been long spent and with the current and rising worthy of a 3rd World country debt to GDP ratio it's vanishingly unlikely it'll ever be repaid. Especially if each succeeding decade continues to be "lost". However, all that said, the Japanese have a modern history of substantial and successful (at least at some levels) remaking of their society, e.g. Sengoku (civil war) -> Bakufu (military government AKA shogunate) -> Meji Restoration sliding into Imperial Japan -> post-WWII fantastic recovery. Although perhaps this success is mostly to be judged from the viewpoint of the ruling class, which has been been all too often fantastically inept. Japan hasn't been run for the benefit of the people as far back as I know (e.g. Sengoku), and one might observe that its terminal demographics are a reflection of the people having reached a tipping point (check out some of the comments in the article; I can say that from what I've read descent rice is beyond the budget of many if not most Japanese (they're now into the 2nd generation of thrifty mothers feeding their children bread for breakfast and noodles for lunch)). Maybe they'll recover. But it won't happen absent something that changes the reward structure so that family creation becomes healthy.
- nandemo 17y ago
  All that money invested in the Postal Savings System is, as far as I know, gone. As the article noted, it's invested in "safe" government bonds, i.e. the money has been long spent and with the current and rising worthy of a 3rd World country debt to GDP ratio it's vanishingly unlikely it'll ever be repaid. Money isn't exactly invested in the Post Office, it's deposited in their savings accounts. Those deposits are guaranteed just like savings accounts in any other country. Well, if everyone tried to take out all their money at the same time we'd have a problem, but that's true of any bank in a fractional-reserve banking system. Japanese bonds are one of the most liquid investments in the world. If you're are so sure they'll never be repaid, contact your broker and find a cheap way to short them! Seriously, if Japan defaulted we'd have a much worse crisis than the recent one. More likely, Japan will just gradually increase the tax burden and devalue the currency in order to pay the debt.

52 points by pg 17y ago

cwan 17y ago

Japan never actually dealt with the bust - and instead of taking the short term hit, they spread it over two decades. This was the problem - not the loss of confidence - which is an effect rather than the cause of the current malaise. When asset prices ultimately collapsed following the bubble, the government chose to prop up zombie banks instead of writing down grossly overvalued assets and restructuring debts - an issue that I worry about myself in the US though I think (and hope) American policymakers are wary of similar consequences. This goes back a bit to the debate over whether or not it's possible to have economic growth without dynamism. That yes, you do have booms but you also have busts but that the net benefits of the booms (in productivity and innovation) far outweigh the consequences of any bust. Governments who attempt to dampen busts (e.g. minimum wage, stimulus, propping up businesses that should otherwise die off) as a corollary also tend to dampen recovery and growth (e.g. resulting higher interest rates, slower hiring, stagnant growth of new businesses as zombie firms squeeze resources that would have otherwise been reallocated).

stcredzero 17y ago
It's often been noted that organized crime had a significant part in the current Japanese malaise. They were part of the reason for the ease with which bad loans could be made again and again. It seems likely that they were instrumental in much of the corruption. Also note that the leadership of the Yakuza is very politically conservative. Putting the brakes on economic development would also serve to slow down social and cultural change, as well as producing a climate generally friendlier to extreme right-wing politics.
kingkongreveng_ 17y ago
You can boil much of the Japanese bubble and persistent malaise down to pervasive fraudulent accounting. Fictitious book values and profits were and are everywhere. I dare say it's more common to Asian cultures than Western, as the 1997 crisis and current practices in China indicate. The moves in the US to weaken mark to market accounting rules to paper over weakness give great pause.
- cwan 17y ago
  The problems in mark to market accounting wasn't so much in the accounting itself which generally should prove irrelevant given that the disclosure ends up being in the notes. The problem is because of regulatory accounting which requires that you need a certain threshold of regulatory capital - and the writedowns (even on bonds that companies intended to hold for their full maturity) meant that they were immediately undercapitalized or overcapitalized based on the whims of the market - an almost perfect storm at the time because these were relatively new regs. Granted, you could make the argument that these banks should have had greater reserves, but it is also useful and relevant to note that many of these banks may not have failed if they were not forced to sell of some of these assets at their lows as a result of regulatory requirements that did not exist only a year or two earlier (I forget the date).

deleted 17y ago

[deleted]

pheon 17y ago

why do people expect japan to rebound at all? with a severely aging population that is highly xenophobic compounded by deflation creating at best a flat to negative domestic consumption. This results in any economic growth being highly export dependent and has been for the last 10+ years. so.. a double blow, the great recession and the new decade of retirement, its a slow fade to #4 or #5 in world GDP.

nostrademons 17y ago
Keynes would agree with you...in the General Theory, his argument was that the "natural" state of the economy was a liquidity trap. Rising productivity results in an increase in aggregate supply, which results in persistent deflation, which encourages people to hold money instead of investing it, which results in a cap on that productivity. IIRC, he even suggested that Europe's long period of stagnation during the Dark Ages was because real interest rates were so high that rational entrepreneurs would never invest in new technology, because there was no conceivable way that they could generate a positive return on capital. And that the pyramids were ancient Egypt's solution to the problem of Keynesian stimulus (i.e. nobody was investing, so they built the pyramids to forcibly confiscate money through taxes and then distribute it to workers who would actually spend it). It makes me wonder what we're in for over the next 10 years. I don't really believe the "permanently stuck in a deflationary trap" theory - there's too much evidence against it. But I think the normal way countries get out of it is through war, which isn't terribly rosy either. In addition to the direct Keynesian stimulus, it also encourages rapid technological development, which opens up new markets that then become fertile ground for investment after the war.
- loganfrederick 17y ago
  Do you know of any evidence against the deflationary trap off the top of your head? I don't disagree with your comment. I'd like to read a good article or paper explaining/disproving the deflationary trap.
  - nazgulnarsil 17y ago

loganfrederick 17y ago

The user cwan nailed the general failures of Japan's economic policy in the 90s, although the root of the problems extends farther back in time than even the Economist article covers. Back in the 70s, Japan's rise as a world economic power was fueled by government loans to private industry, allowing banks to fund abnormally large investments in industries, specifically manufacturing and technology, which helped support the rise of the global Japanese brands (Honda, Sony, etc). These same funds also helped inflate the massive real estate bubble the article briefly covers by selling the concept of the limited real estate space in Japan. What investors in Japanese real estate failed to realize is that even though there is a limited space in Japan, there is an unlimited price that a given piece of land may be valued at but a limited price that it can be intrinsically worth compared to the value of all other assets (hence the overinflated valuations of the properties). For a long time (70s and 80s), Japanese companies made solid progress in commanding global sectors, and their auto companies still do. However, the loans became so large and the earnings generated by the firms eventually declined to levels where the loan payments could not be made. The subsequent bank write-offs on all assets were the cause and/or effect (really a self-perpetuating vicious cycle). I cover these to give a positive spin on the United States situation. While the government has made a number of mistakes in regulating the banking industry and partially inflating the housing sector, it has not tried to directly inflate the economy to the scale the Japanese government did in the 70s. The United States government is propping up some American industries, but again, not to the extent of the Japanese government in the 90s. If that were the case, they absolutely would not have let Lehman Brothers fail. The government is in a tough position, trying to prevent political and economic chaos while allowing markets to reach their own equilibriums. For anyone who fears the China may be catching the United States economy, there is a good amount of evidence that China may be suffering the same syndrome Japan had in the 70s (building its economy based on government money). China will likely deal with the problem more efficiently once a bust occurs, but it does mean that China could be less of a threat than many suspect, assuming the United States is able to innovate at a reasonable rate. Here is a decent article/example of what I am talking about with China: http://www.bloggingstocks.com/2009/09/09/petrochinas-sugar-daddy-gets-30-billion-for-takeovers/ http://www.bloggingstocks.com/2009/09/09/petrochinas-sugar-d...

nostrademons 17y ago

InclinedPlane 17y ago

The real kicker? The US has been using Japanese methods to try to dig itself out of the most recent recession. Even though these methods have already proven to be ineffective we haven't stopped using them.

hga 17y ago

A few semi-random observations: Japan's fertility rate is in the "lowest of the low", a rate from which no other society has ever recovered. You can plot it out so that it's projected there will be no Japanese left by the end of the next? century, but a gentle "will the last person please turn out the lights" scenario is extremely unlikely in such a rough neighborhood, where so many of the neighbors have serious grudges from 20th century Imperial Japan (at the time of the atomic bombings, the monthly death toll of the conquered people was in the low six figures; they killed 250K Chinese just trying to find one Doolittle crew, etc. etc. etc. etc.). All that money invested in the Postal Savings System is, as far as I know, gone. As the article noted, it's invested in "safe" government bonds, i.e. the money has been long spent and with the current and rising worthy of a 3rd World country debt to GDP ratio it's vanishingly unlikely it'll ever be repaid. Especially if each succeeding decade continues to be "lost". However, all that said, the Japanese have a modern history of substantial and successful (at least at some levels) remaking of their society, e.g. Sengoku (civil war) -> Bakufu (military government AKA shogunate) -> Meji Restoration sliding into Imperial Japan -> post-WWII fantastic recovery. Although perhaps this success is mostly to be judged from the viewpoint of the ruling class, which has been been all too often fantastically inept. Japan hasn't been run for the benefit of the people as far back as I know (e.g. Sengoku), and one might observe that its terminal demographics are a reflection of the people having reached a tipping point (check out some of the comments in the article; I can say that from what I've read descent rice is beyond the budget of many if not most Japanese (they're now into the 2nd generation of thrifty mothers feeding their children bread for breakfast and noodles for lunch)). Maybe they'll recover. But it won't happen absent something that changes the reward structure so that family creation becomes healthy.

nandemo 17y ago
All that money invested in the Postal Savings System is, as far as I know, gone. As the article noted, it's invested in "safe" government bonds, i.e. the money has been long spent and with the current and rising worthy of a 3rd World country debt to GDP ratio it's vanishingly unlikely it'll ever be repaid. Money isn't exactly invested in the Post Office, it's deposited in their savings accounts. Those deposits are guaranteed just like savings accounts in any other country. Well, if everyone tried to take out all their money at the same time we'd have a problem, but that's true of any bank in a fractional-reserve banking system. Japanese bonds are one of the most liquid investments in the world. If you're are so sure they'll never be repaid, contact your broker and find a cheap way to short them! Seriously, if Japan defaulted we'd have a much worse crisis than the recent one. More likely, Japan will just gradually increase the tax burden and devalue the currency in order to pay the debt.