The Japan Problem

By: Gabe Harris | Fri, Sep 6, 2002
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Japan had a fabulous stock market from 1950 to 1990. However, upon closer inspection the economic growth of the country was stagnating well before the stock market participants started worrying about any real problems.

Here is a summary of how the Nikkei 225 and the GDP of Japan performed during each decade following WWII:

Decade  % change Avg. Compounded Annual Growth%
1950's* +951% +12.1%
1960's +246% +17.1%
1970's +283% +12.9%
1980's +574% +6.4%
1990's -49% +1.8%
2000's -51% -1%
*I could only find GDP data back to April 1955

The first thing I noticed when looking at this data was how the economic growth slowed dramatically in the 1980's from near 13% down to around 6% average growth in GDP. While this was happening, bullish market participants where enjoying an insane market bubble. At the same time, government expenditures were growing at rates that were much faster than the GDP. However it takes time for the bureaucracy of a growing government to gain the power necessary to kill an economy. In this case it took about 40 years.

Take a look at how this looks on a long term quarterly chart:
Japan Dying

This gives you a good brief overview of what has happened in Japan over the past 50 years.

What has been done in response to the problems?
This is what the BBC reported last year: "The government has repeatedly tried to stimulate the economy by spending money on public works. The result has been some very well-equipped - if often unnecessary - regional infrastructure projects, but relatively little of the money spent reached those who have been made unemployed. Much of it has in fact gone into the coffers of Japan's huge construction companies, which have very close links to ruling party politicians. The spending has kept them afloat; without it many might already have gone bust. As it is, the first domino fell in early December, as Aoki Construction went under with debts totalling 522bn yen ($4bn). And the massive outlay means government borrowing has reached 130% of GDP, higher than any other industrialised country. This means that in the long run Japan will have to reduce its spending levels, at a time when it is facing increased pressures from an ageing population and the increased cost of health care. And that could prove politically painful."

The course of action described above is in line with the ignorant public's understanding of how Keynes and FDR ended the depression by telling governments to spend lots of money, whether they had any or not. An actual study of the depression done by Murray Rothbard dispels this myth. But his book isn't too popular because it doesn't help professors or colleges get government grants, nor does it help professors become good buddies with powerful politicians. The career paths of Larry Summers and Robert Rubin looks like more fun to someone with little intellectual honesty.

The mainstream economists have remained completely clueless IMO, here is a quote from politically connected economist Paul Krugman in May 1998: "Japan's economic malaise is first and foremost a problem for Japan itself. But it also poses problems for others: for troubled Asian economies desperately in need of a locomotive, for Western advocates of free trade whose job is made more difficult by Japanese trade surpluses. Last and surely least - but not negligibly - Japan poses a problem for economists, because this sort of thing isn't supposed to happen. Like most macroeconomists who sometimes step outside the ivory tower, I believe that actual business cycles aren't always real business cycles, that some (most) recessions happen because of a shortfall in aggregate demand. I and most others have tended to assume that such shortfalls can be cured simply by printing more money. Yet Japan now has near-zero short-term interest rates, and the Bank of Japan has lately been expanding its balance sheet at the rate of about 50% per annum - and the economy is still slumping. What's going on?"

At least he was honest. Most of the economist simply ignore the fact that the theories they are teaching to naive college students have been shown to be complete crap. Krugman has actually thought about the problem. (a lot of his articles are posted here)

Greenspan must be finally getting worried about the similarities between the situation here and in Japan. Somebody at the Fed cared enough to have a paper written about the situation. They basically say they are not gonna be able to predict a "deflationary" period like Japan's, so just to make sure that one doesn't happen they should try to error on the side of keeping rates lower than they would otherwise.

BTW, this is what people were saying at the beginning of Japan's bust:

I copied this from Eric Fry at The Daily Reckoning, who was quoting James Stack, editor of Investech Research: " might be surprised or shocked to learn the following assessment of Japan's bubble at 30 months after the Nikkei Index had peaked, from a July 11, 1992, story in The Economist called 'How Japan Will Survive its Fall.' (It's subtitled 'The economic slowdown in Japan should not be confused with a Western-style recession. Which is why Japan will come bouncing back.')"

This sounds like some of the swill spewing from the eternal optimist on our side of the Pacific ocean. Kinda scary huh?

Is it really that bad? Or should we expect things to pick up anytime now?

Lets take a look at the 2001 budget(I took it from the Japan Ministry of Finance web site): (All figures in the chart are in (billions of yen) current exchange rates are 116 yen=1 dollar)

  FY 2000
From 1999
FY 2001
 Tax Revenue 48,659.0 1,540.0 50,727.0 2,068.0
 Non-tax Revenues 3,718.1 26.9 3,607.4 -110.7
 Government Bond Issues 32,610.0 1,560.0 28,318.0 -4,292.0
 Construction Bonds 9,150.0 190.0 8,760.0 -390.0
 Special Deficit-financing Bonds 23,460.0 1,750.0 19558.0 -3,902.0
TOTAL 84,987.1 3,126.9 82,652.4 -2,334.7
 National Debt Service 21,965.3 2,133.4 17,170.5 -4,794.8
 Local Allocation Tax Grants 14,930.4 1,407.4 16,823.0 1,892.6
 General Expenditures 48,091.4 1,203.6 48,658.9 567.5
TOTAL 84,987.1 3,126.9 82,652.4 -2,334.7

The total expenditures were 82 trillion yen, this equals about 700 billion USD. Since the US population is about 290 million and the Japan is about 130 million That is roughly the equivalent of what the US government is spending on a per capita basis. That is not very encouraging, but not an especially big deal if everything else is ok. Unfortunately  everything else is NOT ok. They don't have enough income generated by taxes to pay for the 700 billion dollars in outlays. So in 2001 they had to borrow 28 trillion yen(244 billion USD) in order to pay for everything they needed in order to maintain political stability. That means that they have to borrow over 34% of the funds they spent in 2001. But that is just the start of their problems. Notice the row labeled "National Debt Service", the naive CNBC talking head may observe that things are getting better since that number fell from 2000 to 2001. The truth is that they have managed to dupe suckers into rolling over some of their debt at lower interest rates while piling on loads of extra principle. (Kind of like refinancing your house at lower rates but taking out 200% of the equity you have in it and spending althea money on trips to Las Vegas, right as you are about to lose your job). Of the actual income the Government has coming in from taxpayers(who are being counted on to pay off the mountains of debt being built up), 34% goes straight to the holders of the government issued debt! Hundreds of mainstream economists have been trying to figure out a way for the Japanese government to stop deflation and create some inflation. However, even if they do figure out how to do that, then how will the government be able to pay it's creditor's? If the interest rates on their debt rise by as little as 1% then the amount of money they would have to spend annually on "National Debt Service" could easily double or triple and consume over 100% of the tax revenues! This is because interest rates in the last couple years have been in the .25% range so any increase in rates would be devastating to their budge situation. If they can't create the inflation then they gradually crumble under the growing annual budget deficits being piled on on top of the other. Either way it appears to me that the smart Japanese citizens are going to be searching for someplace to keep their life savings besides in the government issued fiat currency. Historically, people have fled to gold when the politicians have lost control of the currency tried to manage. Who knows what will happen this time?

Last winter, when the government over there started making noise about reducing the amount of yen they would insure in citizen's bank accounts, it is widely reported that the gold buying in Japan increased significantly. Many people think this contributed largely to the $60 run up in gold over the past 2 years. If that is true then, after looking at there overall picture I think it could be a sign of things to come. Apparently the Moodys credit rating agency considers this a risk as they have recently moved Japan's debt to the same level as Botswana. Japan is the 2nd biggest economy in the world. I don't think many people take this very seriously. I can not figure out why. During the recent spring and summer months the BOJ and the US Gov have been intervening in the market to try and keep the value of the dollar from falling versus the Yen. This is truly bazarre, why does this not get more attention from the political and financial columnist. Our government, headed by what is supposed to be the "free-market" party is intervening in the world currency markets to try and boost its own ill managed currency against a countries currency whose government debt is rated lower than Botswana!! When stuff like that is happening, why aren't people even interested!?!


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