Posted on 05/18/2021 12:27:06 PM PDT by Red Badger
What This Period of Japanese History Teaches Us About Financial Crises
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Japan's economy was the envy of the world before succumbing to one of the longest-running economic crises in financial history that would come to be known as the Lost Decade. In the 1970s, Japan produced the world's second-largest gross national product (GNP) after the United States and, by the late 1980s, ranked first in GNP per capita worldwide. But all of that ended in the early 1990s when its economy stalled.
What Caused Japan's Lost Decade? Most economic crises immediately follow an economic boom where valuations disconnect from reality. For example, the dot-com bust and the Great Recession in the United States immediately followed several record U.S. stock market valuations.1
Similarly, Japan's lost decade was largely caused by speculation during a boom cycle. Record-low interest rates fueled stock market and real estate speculation that sent valuations soaring throughout the 1980s. Property and public company valuations more than tripled to the point where a three square meter area near the Imperial Palace was sold for $600,000.2
Upon realizing that the bubble was unsustainable, the Bank of Japan raised interest rates to try and stem the speculation. The move quickly led to a stock market crash and debt crisis, as borrowers failed to make payments on many debts that were backed by speculative assets.3 Finally, the issues manifested themselves in a banking crisis that led to consolidation and several government bailouts.4
Japan's Lost Decade in Detail After the initial economic shock, Japan's economy was sent into its now-infamous lost decade, where economic expansion halted for more than ten years. The country experienced low growth and deflation during this time, while the Japanese stock markets hovered near record lows. The property market never fully returned to its pre-boom levels.3
Economist Paul Krugman blames the lost decade on consumers and companies that saved too much and caused the economy to slow. Other economists point blame at the country's aging population demographic or its monetary policy — or both — for the decline. In particular, the slow response of the Bank of Japan (BOJ) to intervene in the marketplace may have exacerbated the problem. The reality is that many of these factors may have contributed to the lost decade.
Following the crisis, many Japanese citizens responded by saving more and spending less, which had a negative impact on aggregate demand. This contributed to deflationary pressures that encouraged consumers to further hoard money, which resulted in a deflationary spiral.
Japan's Lost Decade vs. the 2008 U.S. Crisis Many economists and financial experts have compared Japan's lost decade to the U.S. situation after the 2008 banking crisis. In both cases, speculation fueled real estate and stock market bubbles that eventually crashed and led to government bailouts. Both economies also responded by promising to increase fiscal spending to combat deflation.
The period between 2000 and 2009 in the U.S. has also been called a lost decade on occasion since two deep recessions at the beginning and end of the period resulted in a net-zero gain for many households. Steep declines in real estate values and the stock market resulted in significant losses, including the S&P 500's worst ever 10-year performance with a -9.1% total return.5
Despite the similarities, there are also some important differences between the two situations. Japan's aging population was a major contributor to its woes, while the U.S. maintains relatively positive demographics with plenty of young workers entering the workforce. The U.S. Federal Reserve has also been much quicker to act than the Bank of Japan.
Lessons Learned From Japan's Lost Decade Japan's lost decade has provided many valuable economic lessons. Some economists argue against any interventions on the part of central banks, contending that they inevitably lead to moral hazard and longer-term problems. But others argue that interventions should take the market by surprise in terms of timing and scope.
Some key lessons were:
Act quickly to stem the crisis. The Bank of Japan's reluctance to act quickly caused a crisis of confidence among investors and may have exacerbated its problems.
Spending isn't the answer. Japan's attempts to spend on public works projects weren't particularly successful in helping it recover more quickly from its economic woes.
Counteract demographics. Japan's reluctance to substantially raise its retirement age or taxes only helped to further its demographic problems.
Don't rack up debt. Japan's massive levels of debt were ultimately responsible for its crisis and the lost decade, and the BOJ was behind the curve in raising interest rates.
“Don’t rack up debt.”
It wouldn’t have anything to do with overreliance on foreign trade and gouging their own domestic market with overly high consumer prices to subsidize their cut-throat competition internationally, witness the closing of the last American made t.v. plant, Zenith in the 1970s?
Oh you can really learn a great deal more about that. They destroyed 8 of our top 10 industries during that 20 year time period, especially in Ohio.
Oh, but the “deficit isn’t real because it’s just money we owe ourselves”, and “we don’t need to worry about consumer debt levels because interest rates are basically zero”, etc, etc.
You can’t beat the laws of economics any more than you can beat the laws of thermodynamics. We’ll just have to learn that lesson the hard way, again.
I lived in Japan 1988 - 1991. Several of my coworkers were buying houses and small shop building as investment with loans they could just barely cover. Why? “You can’t lose money in real estate.” And the market had been booming and everyone thought it would stay booming. A downside couldn’t be seen. Then the mid-late 1990s hit and they lost it all. Everything.
Nothing is forever.
10 years from today our nest eggs will be bigger with no withdrawals. Any 10 year cycle does that.
I’m no expert but part of the problem could be that Japanese women aren’t having kids.Japan is now one of the oldest,if not *the* oldest,of the world’s major countries.
I stopped reading at this point. Anybody who takes this ideologue and idiot seriously is not worth reading.
Don’t pay people not to work
After Bush I rewarded the Tiananmen Square butchery with Most Favored Nation trade status, the same grifters that shipped our jobs and industry to Japan discovered that China was even cheaper.
I lost a decade once...but then I sobered up! ;) *Ba-Dump-Dump*
Actually, I consider 2004-2012 America’s Lost Decade, under 0bama.
1977-1981 sucked, too.
Dementia Joe is going to make those years pale by comparison!
Golly Gee, the timing of Japan’s crash coincides with when China started manufacturing more and more things at low wages and low costs. Japan invested heavily in China’s industrial growth. As in the US, globalist investors received great returns on capital, while the wages of their own working class were driven down by competition with extremely low wages and state subsidies. (Chinese wages have risen since and the Chinese have to compete with even lower wage areas like Bangladesh and Africa). Odd that Krugman forgot the word “China”.
Yep, figures. I’m getting ready for retirement. Just filed for my SSI today. Looks like my savings, and IRA is shrinking in ‘value’ every day, due to the coming inflation bomb..............
Yes, that. Plus S. Korea -- you could name the brands -- came in with quality, and at lower prices than Japan -- steel, Kia, Samsung, GoldStar, LG, Hyundai, big ships. Those guys really jumped in big during that period.
Well, that sucks! Stock up on bullets and Mac-N-Cheese. ;)
I have 1.5 years to go to claim my SS. I can’t wait! Hope it’s still there... :)
It seems like every economic crisis is caused by the big banks and whoever controls the printing press.
Yes, if your population is steadily getting older your economy will shrink. You either need to have babies or have immigration. Japan chose neither.
27% of Japan is over 65. In the USA it’s only 15%.
“Oh you can really learn a great deal more about that. They destroyed 8 of our top 10 industries during that 20 year time period, especially in Ohio.”
Let’s give the unions the credit they deserve, as they were far more important than Japan in destroying US manufacturing, and then government regulations didn’t help (excessive pollution and safety).
Also, it should be noted that foreign, non-union, plants did just fine, including in Ohio. Funny how that works, when you can tell the UAW where to put it.
“I’m no expert but part of the problem could be that Japanese women aren’t having kids.Japan is now one of the oldest,if not *the* oldest,of the world’s major countries.”
Back then, Rush said that the answer for us was to “Export Liberalism”, and we did just that, with women in Japan entering the labor force. The falloff in kids resulted, as it ALWAYS RESULTS from those policies.
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