When I was growing up in the late 70's and throughout the 80's, the Japanese economy was a major paradox. This miraculous economic machine was a source of both admiration and envy.
Perhaps ironically, it was the end of conflict between two enemies from World War II and the beginning of Cold War era fears involving the Soviet Union that helped to build this manufacturing machine. The United States provided financial aid to rebuild a devastated war torn Japanese economy. Influenced by western ideas and lifestyle, things changed in Japan. As these two former bitter enemies became trading partners a new force began to grow in the far east.
It seemed like this nation that was fairly small geographically, was destined to be the ruling giant from a manufacturing standpoint. Growing up in Michigan, I heard over and over how wrong it was for "patriotic Americans" to buy cars made in Japan. At that time the union influence was so strong that they were able to just about hold the U.S. auto industry hostage with their demands for higher wages and unsustainable benefits. Those decisions and the costs contained in them are now coming due and payable.
All the while the Japanese economy continued to grow. Even though Japan had relatively few natural resources, they did have an amazing work ethic and remarkable ingenuity. They basically reviewed manufacturing methods of western companies, found ways to improve them and began making the same products as their western competitors.
But they made them faster and in many cases better. Assembly lines were robotized long ago to cut down on errors and crank out products. While American car companies continued to build big vehicles that sucked up fuel, Japan rolled out high mileage vehicles. An advantage to being forced to import resources such as fuel and energy is the ability to look into the future and notice trends.
The continual energy crisis events of the 70's just added to the appeal of these cheaper, more efficient cars. The Japanese economy began to explode as products were exported to the largest economy in the world. The United States of America.
At the same time Japan seized the market share of many more products. In particular, nearly everything involved with electronics. Timing was good again as they led the way in development of better options of VHS equipment, video games and eventually computer components. It seemed as though the only question was, how soon it would be till the Japanese economy would assume the top spot in the world?
This booming market share dramatically increased the wealth of Japanese citizens. A complicated system of interlocking companies aligned with specific banks added fuel to the fire. People sought out these high paying jobs within the successful companies. They were required to work long hours with unquestioned dedication. In return they were promised long time employment and very generous pensions. This was a dramatic change from the lifestyle of citizens prior to World war II.
Money was flowing in as exports flowed out. That money needed a place to go. Japan's culture encouraged a saving mentality. Remember this as we reach the end of the page. It will come up again.
All this volume of savings in banks led them to more lenient lending practices. Does this sound a little bit familiar? Remember how we always talk about learning from history?
The Bank of Japan, that nation's version of a central bank loosened up policies and speculation on real estate and stocks took off. As did prices. Values were inflated as the Japanese stock market, the Nikkei reached unheard of heights. Land values, or at least the illusion of values soared as well.
As more money was pouring in, investors looked overseas to spend it. I still remember when Japanese investors bought the Pebble Beach golf course. Our national tournament, the U.S. Open would be held on a foreign owned golf course. And then Japanese investors bought other famous American companies. I heard over and over how our entire country would soon be owned by savvy Japanese investors.
The Nikkei hit 39,000. Land prices in Tokyo were far higher than even Manhattan. It seemed as though everything was going up in this Japanese economy. I always liked history, but was just starting to gain more interest in this clamor about being overtaken by this smaller island nation that seemed to be far ahead of everyone else. Remember that part as well. It will come up again too.
This was the first time that I ever heard of Harry Dent. He warned of an upcoming collapse in the Japanese economy. He said prices were so far overvalued that they had to correct. He predicted a massive Nikkei crash that would bring down the real estate prices as well and would throw the nation into a deflationary swamp. He wrote that their stock market would lose more than half it's current value. He said their real estate values would plummet to unimaginable depths. He spoke of a decade of flat lined growth.
I wasn't really sure what he was talking about. I dismissed it all as just crazy talk. Probably because that is what the so-called economists told us on television. And then it happened.
The Japanese economy bubble popped.
The Bank of Japan reacting to government pressure regarding ever growing asset pricing pulled the trigger on monetary "management." They changed course and tightened the money supply. A real example of how a bubble economy that is driven by central bank actions in Keynesian fashion will burst for the same reason. Bubbles always burst. Now we saw it first hand.
The economic miracle machine was broken in 1990. It hasn't come back since. These "Lost Decades" have produced just about flat line growth. Not too many more drops, but not too much more gain. Wages haven't dropped too much anymore since then, but they have also not risen much either for most citizens.
Those people who were promised jobs for life still had most of them. It has taken wave after wave of government stimulus to keep these failing companies doors open. We gained a new term from this era. "Zombie companies" were kept open by government cash infusions. In Japan as well as America, "government cash infusion" means tax dollars given to failing companies. Think Solyndra! We still didn't learn anything from history.
The Nikkei dropped like a rock. It hasn't come close to recovering since then. Much of the residential real estate in the big cities are worth 10% of the numbers from the 80's
Wait a minute! Flat line growth? Consistently lower property values? A stock market that dropped by well over half? Where did we hear about that? Oh yeah, it was that "crazy talk" from years ago.
Shinzo Abe is the prime minister of Japan. He has taken the path of "all in." He has strong armed the Bank of Japan to the point where that entity is basically a ward of the state. Fiat currency printing has reached historic volumes. As with all artificial stimulus, it does create a fresh high. For a while.
The Nikkei did respond. It did go up. Just as it has all the other times Japan has printed more fiat currency. But like all drugs, the high wears off and the problem returns.
Japan is still facing the same issues. Very low birthrates. Less opportunity for the next generation and much more competition in this global economy.
The prime minister has embraced the idea of devaluing the yen so exports will be more attractive. China, South Korea and now Vietnam have cut deeply into the market share of Japanese exports.
One of the downsides to devaluing currency is the effect on citizens. Money is worth less, so it buys less. The citizens of a country seeking to gain more export share cannot afford the very products being built in their own country. We learned how this worked in "How An Economy Grows And Why It Crashes." Peter and Andrew Schiff showed us this lesson in illustrated form in their new instant classic.
This is Abe's second bite at the leadership apple. His first stint as prime minister lasted about one year. This time around he has moved toward a much more Keynesian viewpoint. Paul Krugman would be proud.
But history still holds it's value. We should have learned by now that basic economics will correct itself if left alone. Manipulation by fiat currency printing, not allowing "to big to fail" companies to fold and currency devaluing will always hurt more than help.
Sooner or later, the cheer leading must be replaced by actual, sustained growth. The Japanese economy went from a model for manufacturing to the example of bubble dynamics.
They have once again looked at western methods and attempted to make them more efficient. The problem here is that they have emulated flawed policy rather than proven mechanics. They have taken "quantitative easing" and put it on steroids.
The ratio of government debt to GDP stands at over 200%. I didn't hit too many keys. It is over 200%. Amazing and dangerous. Even a modest interest rate raise could spell doom for those holding that debt. And for the everyday citizens. Keynesian economics always protects the banks first.
I guess they have an argument that they have nothing to lose. Thirty years of revolving door politics have produced no improvement. Luckily for them, that spirit of saving is still in place. There may not be as much to save, but still the goal is there. And much of their overall debt is not centered on personal numbers.
It might be enough to get more of them through the mess. But as with all things manipulated, it only takes a trigger event to cave it all back in again.
Someone has to pay for the soaring debt in Japan. As is the story in America, it will fall to the next generation. Debt cannot be cured by adding more debt. Eventually it either has to be totally de-leveraged or inflated away. Either course hurts the very people who are most vulnerable.
The Japanese didn't learn from American mistakes following the Great Depression and subsequent recessions that followed since the birth of the federal reserve system. This would be the system that would keep us out of recession by skillfully managing the money supply. (Editor's note: Written in my most facetious tone) Some track record on that front. Now they are following Helicopter Ben and his money printing mania.
The Japanese economy has gone to record heights and darkest depths. Are we paying attention? History always teaches us. Japan was ahead of us in boomer group spending cycles. Now we are reaching that point. Both nations are piling up negative numbers compared to gross domestic production. Only one has the advantage of holding the world's reserve currency.
Watch where the chips fall.