

Twenty years on Japan is still paying its bubble-era bills - pg
http://www.economist.com/businessfinance/displayStory.cfm?story_id=15176489&source=hptextfeature

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loganfrederick
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-d...](http://www.bloggingstocks.com/2009/09/09/petrochinas-sugar-daddy-
gets-30-billion-for-takeovers/)

~~~
cwan
One additional note that I'd also make is that intercompany shareholdings
(keiretsu used to promote stability and prevent takeovers) were in essence
financed by the government and in turn made the mess even more difficult to
ultimately deal with given the incestuous crossholdings and restructure firms.

I agree with you on the obstacles facing China to becoming a superpower which
are far greater than others imagine. Working there, you see how inefficiently
resource allocation has been for state owned enterprises which in turn have
propped up stock prices and real estate. How they're able to deal with any
bust politically is what scares me.

The government is already largely hated/strongly disliked in many quarters
(there are many who have long memories not to mention the obvious and very
visible corruption). It bears mention that that China liberalized not because
they wanted to, but because they had no choice given how poor their people
were. When the bust happens, the increased civil unrest and the government's
overriding resolve to maintain power will be a volatile combination - one that
Japan didn't have to deal with.

I also agree that the parallel of Japan seems more relevant to China than the
US. China's non performing assets in their banking sector has likely grown
quite significantly with the push for lending in the last year. The average
Chinese aren't stupid either - which makes it a potential catastrophe if
certain world leaders get their wish that the RMB is allowed to float. Capital
will rush out of China and its domestic banks causing a financial crisis and
ironically potentially a RMB that is worth substantially less than it is
today.

~~~
nazgulnarsil
inefficient resource allocation is an intrinsic property of central planning
and is the main balancing force to economies of scale that drive organizations
to become larger. this eventually results in the "smaller companies eating
their lunch" phenomenon that we love so much.

of course with government customers couldn't traditionally just "go
elsewhere". this is showing signs of changing (lichtenstein, switzerland, hong
kong, singapore, etc.).

------
cwan
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).

~~~
kingkongreveng_
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
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).

------
hga
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
_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.

~~~
hga
My comment is of course about the long term ... but the medium term might not
be very fun:

Japan is aging at a terrific rate, and those elders _will_ be pulling money at
net out of their savings accounts (especially those who have had pension
records lost by prefectures). So there will be a "run on the bank" at some
level, but not the sort that causes a panic.

Bottom line here is that by definition current consumption must come from
current production. Now they might be able to snare some current production
from other countries by selling those bonds abroad ... but all in all I just
don't see the _current_ Japan Inc. making it work for too many more decades.

Peoples and societies have gone extinct before, I don't think you can say it's
impossible in this case.

------
pheon
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
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.

~~~
stcredzero
_But I think the normal way countries get out of it is through war, which
isn't terribly rosy either._

How about an upsurge in space exploration? The colonization of Mars, enabled
by plasma rocket technologies like VASIMIR? The exploration and colonization
of Mars has been likened to the exploration and colonization of the Americas.
Mars has sunlight and soil suitable for cultivation of terrestrial crops, and
geology influenced by large amounts of water, which likely means deposits of
easily exploitable ores. (The point being, to exploit resources locally, and
to use Mars as a base of solar-system wide civilization, not to export back to
Earth. Mars is positioned advantageously to be the center of economic power of
such a civilization. Earth, disadvantaged by its large gravity well, will
become a 2nd rate location.)

It sounds far-fetched, but I think a careful examination of technology will
reveal it to be quite plausible. Unfortunately, opportunities for colonization
have historically led to war.

~~~
nostrademons
It would be awesome if it happened, but what's the motivation? Usually such
ambitious projects only happen for regions of national pride. National pride's
the same motivation that gives us war, and without the sort of mutually-
assured destruction and memories of the last war that we had during the cold
war, it's easier to whip up the people into a shooting frenzy.

~~~
stcredzero
What's the point? How would WWII have played out differently, if the majority
culture across North America was Germanic?

------
InclinedPlane
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.

