Some thirty years ago, we used to talk about Japan in much the same tone as we now do of China. Japan was seen as an unstoppable economic growth machine. For most of us, it was only a matter of time before Japan overtook the United States as the world’s largest economy. Ten years later, the Japanese economic miracle ground to an ignominious halt. Japan was becoming a forgotten country and the country has struggled to show significant growth ever since.
The Japanese asset price bubble [baburu keiki] was an economic bubble in Japan that took place from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble’s collapse lasted for more than a decade with stock prices initially bottoming in 2003 and descending even further in 2008.
Back in the 80s, the easily obtainable credit helped create and engorge the real estate bubble. As late as 1997, banks were still making loans that had a low probability of being repaid. By then, Loan Officers and Investment staff had a hard time finding anything to invest in that would return any kind of profit. They would even resort to depositing their block of investment cash, as ordinary deposits, in a competing bank. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called “zombie businesses”.
In 1989, in Tokyo’s Ginza district, choice properties prices were fetching well over $215,000 US dollars per square meter, this is well over $93,000 per square foot. Suddenly, by 2004, prime “A” property in Tokyo’s financial districts had slumped to less than 1 percent of its peak value, and Tokyo’s residential homes were less than a tenth of their peak. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the last American financial crisis and its consequences worldwide.
Over the years, in what is now referred as the Japanese “The Lost Decade”, with the combined collapse of the Tokyo stock and real estate markets, tens of trillions of dollars worth were wiped out.
In an attempt to find anything positive in any type of catastrophic events, it is becoming fashionable to argue that they might just prove to be the shock that the world or a country needs to purge itself of the political inertia and economic paralysis into which it has fallen. Well, possibly, but the truth is that, regardless of the disaster’s potential to galvanise change, the world’s future, like Japan’s future before, may already be largely pre-ordained. There is a point where economies simply outgrow their capacity to grow. If there is a lesson to be learned from the Japanese [baburu keiki], it is that Japan, in time merely returns to where it was.
Today, Japan is now in the front line when it comes to the three biggest challenges which, to varying degrees, afflict all of the major advanced modern economies: excessive public debt, the demographic costs of an ageing population, and increasingly acute energy insecurity. What is more, the banking crisis that years ago killed off the Japanese growth story has been replicated across all Western economies, many of which are now threatened with much the same deflationary, low-growth future and this is not altogether looking very good.
As we look back, for all the loss of national self-esteem, the reality is that Japan has coped with the aftermath of its banking crash reasonably well. Output has stagnated, but in per capita terms it remains one of the highest income countries in the world. Furthermore, it has managed to maintain a degree of social cohesion that higher growth economies struggle to replicate. As for today’s economic events, their consequences will be much more widely felt then they were in Japan. Coming on top of a resurgent oil price, they constantly threaten to derail an already all-too-fragile recovery across modern advanced economies.
For years to come, worldwide monetary policies will, remain accommodative at the most for longer than otherwise.