Japan…the Lost Decades
Written by Jeff Thredgold, President, Thredgold Economic Associates
May 24, 2011
An Overview: Economic and financial pain within the U.S. has been all too commonplace during the past few years. The S&P 500, a weighted stock market index of 500 large publicly held companies that trade on either the NYSE or the NASDAQ—and a broader stock market measure than the Dow average—is now where it was 12 years ago.
U.S. home prices, after surging in many states during 2003-2007, are now roughly back to levels of 8-12 years ago as well. Add in 9.0% unemployment, the fact that we have seven million fewer workers today than before the Great Recession, and trillion dollar annual budget deficits for as far as the eye can see, and the past decade has been one to largely forget.
If misery loves company, however, picture our woes as compared to those of the Japanese people…
Japan was the global economic victor of the ‘60s, the ‘70s, and the ‘80s. Most forecasts in the late 1970s and early 1980s logically assumed that Japan would continue to dominate the world, with a longer-term goal of eventually surpassing the United States as the world’s largest economy.
Wealthy Japanese investors bought “trophy” properties (ritzy golf resorts and high profile office buildings) across the U.S. and around the world, flaunting their economic success. Top-end casinos catered to the Japanese high-flyers, as opposed to the Chinese today. The Japanese were accused more than once of being just a bit arrogant about their successes.
Such a view was held by Japanese stock market investors, who pushed their primary stock index, the Nikkei 225, above 39,000 in early 1990. That index is below 9,500 today, or down 75% from its peak 20 years ago…so much for lavish retirements.
Then the Roof Fell In
Economists talk about “the lost decade” of the 1990s, when the Japanese economy ground to a halt. I would suggest there have now been two lost decades, with only minimal economic growth at times led by new government spending and enormous budget deficits.
While the world focuses on high debt levels in Greece, Ireland, Portugal and other southern European nations (as well as in the U.S.), the Japanese national debt exceeds 200% of its gross domestic product (GDP), the highest in the history of the world. We hear much less about this debt issue because the Japanese people and Japanese institutions are the major buyers of such debt obligations, with extremely low (for the moment) interest rates.
Japanese consumers have also had to deal with deflation (declining prices, followed by declining incomes) for much of the past 20 years. History teaches us that dealing with deflation is much more challenging than controlling inflation.
Then Came March 11
Adding insult to injury were the horrific events of last March 11, when the combination of a 9.0 earthquake, a devastating tsunami, and a major nuclear accident shocked northern Japan. The loss of more than 24,000 people and the total destruction of various towns in the hardest hit areas led to an estimated $300 billion in damage, the most expensive natural disaster in history (The Washington Post).
The Japanese economy fell back into recession in recent months. Deflation has returned. Estimated economic decline should be even greater in the current quarter than in the first, where only 20 days of the disasters impacted the economy. Brighter prospects suggest that modest growth should return in 2011’s second half, as massive spending for rebuilding will lift the economy, at the expense of even larger budget deficits.
Japan’s shell-shocked consumers will continue to reminisce about the glory days of the 60’s to the 80’s, when performance was strong, incomes were rising, and expectations were sky high. Today’s outlook is far different.
When U.S. politicians go in search of another Western nation to perhaps use as an example of what policies this nation should consider, they need only look north of the border. The Canadian economy is outperforming that of its larger neighbor in numerous measures, with 3.3% real growth in 2010, versus 2.9% in the U.S.
Canadian job creation has been better on a relative basis in recent years than that in the U.S. Declines in their unemployment rate have also been more impressive, with the current 7.6% jobless rate looking good versus the 9.0% rate in the U.S.
Canadian consumer inflation at 3.3% during the most recent 12-month period largely matches that within the U.S. Overall economic performance has slowed in recent months, like in the U.S., falling victim to higher energy costs.
No Boom…No Bust
The American housing boom of recent years, followed by the ongoing painful bust, was largely absent in Canada. Their major banks and other mortgage lenders didn’t get heavily involved in the “securitization game” which contributed to the U.S. housing spike, then plunge, of recent years.
Yes, the Canadian economy did go into recession a few years ago, in line with most major nations. After all, their major trading partner, the U.S., was flat on its back. Yes, budget deficits were used to help boost the economy back on its feet.
Yes, the Canadians have other issues. Their government-sponsored health care program is arguably broken, with long waiting lists and millions of people who can’t find a family physician (The Wall Street Journal). Aggressive development of rich energy resources in western Canada was raised the ire of environmentalists.
However, much greater application of “living within your means” is found here. The new majority government of the Conservative Party, the first non-Liberal Party majority in 23 years, promises a balanced budget by 2014-15 without raising taxes, a forecast that has solid credibility. The projected Canadian debt-to GDP ratio of below 30% in 2015 will be less than a third of the projected debt-to-GDP ratio in the U.S.
Taxes are being cut. The “welfare state” built in Canada between the early 1960s and the early 1990s has been somewhat dismantled. The Canadian outlook is upbeat, with government playing a lesser role in peoples’ lives.
What a concept!