Monday, January 9, 2012

Is the Japanese Economy Really As Bad as Portrayed?

In the late 1980's, I started traveling to Japan a couple of times a year.

Japan was the envy of the world at that time.  Books were published in the US describing how the Japanese "miracle" had turned a country ravaged by World War II into the most vibrant economy in the world. Land values soared in Japan, and at one point it was estimated that the land under the Imperial Palace (3 miles in circumference) was worth more the entire state of Colorado. The Nikkei hit 39,000 in 1989, and few observers dared to suggest that Japanese stocks were overvalued.

My work in Japan was mostly with the banking area.  Using Fannie Mae mortgage-backed securities, I had developed and managed a series of mutual funds targeted for Japanese banks and insurance companies.  The funds were mostly successful - the demands for alternative asset classes in the Japanese financial sector were high - so I had the chance to meet with Japanese executives on a regular basis.

The timing of my work in Japan - which extended from 1989 to 1997 - gave me a front row seat at the unraveling of the Japanese miracle.  As it turned, my initial trips to Japan also coincided with the peak of Japanese economy.  In retrospect, the entire Japanese financial system was in the midst of a giant bubble, which started to deflate in 1990.  Since so much of the system was based on leverage, the more prices fell, the more the decline accelerated, as panicked borrowers sold assets to meet repayment demands.  The largest Japanese banks - which had been so eager to fuel land and stock speculation - turned into "too big to fail" zombies in just a few years, kept alive by the government.

Japan is often cited as a cautionary tale in this country. There are numerous unfortunate similarities: high debt levels, rampant financial speculation, and huge money center banks weighed down by the legacy of bad lending.  Indeed, Fed Chairman Bernanke was critical of Japanese authorities for not being more aggressive in addressing their problems in the 1990's, which in part explains some the Fed's moves in the past few years.

However, in recent months there have been several commentators that have been suggesting that, hey, maybe living in Japan these days really isn't so bad after all - the stock market be damned.

Typical was an article in yesterday's New York Times.  Titled "The Myth of Japan's Failure", the author Eamonn Figleton cites numerous statistics and anecdotes to bolster his contention that Japan's economic condition is actually better than portrayed in the West.  Here's an excerpt:

...By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990.

By some of the most important measures, it has done a lot better than the United States. Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.

Worth a read.