Tuesday, February 17, 2009

The Myth Of The Lost Generation

"If you delay acting," President Obama warned Congress this month, "you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s… and as a consequence, they suffered what was called 'The Lost Decade' where, essentially… they did not see any significant economic growth." Actually, Japan’s GNP grew by nearly 10 percent during the 1990s. While such growth is meager, it was only part of the story. Before the United States rushes headlong into printing several trillion new dollars, with all the risks that entails of debasing the currency it is worth considering what was really lost in Japan’s "lost decade."

On the bleak side, Japan lost jobs. Its unemployment rate during these 10 years averaged 3.6 percent which, while high for Japan it was lower than any other country in the G-5 which, like Japan, had to compete with the surge in cheap-labor exports from China in the 1990s, In 1995, the midyear of the decade, while the unemployment rate was 3.2 percent in Japan, it was 5.6 percent in the US, and well over 8 percent in Germany, Britain France. Italy, and Canada.

What Japan did uniquely lose in the "negative spiral" was the incredible price froth that accompanied the 1980a bubble. At its height in 1989, real estate in Tokyo sold for as much as $139,000 a square foot– more than 350 times as much as choice property in Manhattan. Such valuation made the land under the Imperial Palace in Tokyo notionally worth more than all the real estate in California. The Japanese stock market, with some shares selling for a thousand times their earnings, similarly skyrocketed. Indeed. In 1989, the notional value of the stocks listed on the Tokyo exchange not only exceeded all the stocks in America, but represented 44% of the value all the equities in the world. When the bubble burst– as all bubbles do– real estate lost about 80 percent of their former value, and stocks plunged about 70 percent. As a result, the banking system that had extended virtually unlimited credit on pyramids collateral based on these assets, were left, if not insolvent, paralyzed. To the extent that the heady prices of the late 1980s proceeded from a wild flight from reality, their fall represented a cruel regression to the norm.

On the bright side, Japan had no inflation during this decade. So while the Japanese could no longer relish the fantasy that the land under their Imperial palace was worth more than the state of California, they could now more easily afford to buy homes, burial plots, and golf club memberships in Tokyo. The Japanese currency also was not debased in the crises, and a strengthening yen made vacations abroad and foreign imports (including fuel) far less expensive. The Japanese also continued to save. Unlike in America, in which the personal savings declined to a mere 5 percent in the 1990s (and became negative by 2005), Japan’s personal savings rate remained over 20 percent, providing some cushion of safety during this era. And Japan’s life expectancy rose in the 1990s to over 80 years, the highest of any major country, and 5 years longer than that of the United States.

Nor did Japan lose its advantage in international trade. Its automotive manufacturers, with the help of new hybrid and other fuel-efficient engines, gradually displaced their American competitors in world markets. Its electronic manufacturers, launching DVD players, digital camera, and high-definition TVs, changed the global face of home entertainment. Its state-of-the-art robotics and machine tool industry meanwhile provided China with the technological backbone for its economic boom. So even without "significant" growth in this decade, Japan remained the second largest economy in the world.

What was really lost in the crash was a popular delusion– the assumption that something as transient as the notional price of assets had enduring value. Once this illusion was brutally shattered, not even ten government stimulus packages, which totaled more than 100 trillion yen and caused public debt to exceed 100 percent of GDP, could resurrect it.