Is Japan's Lost Decade Being Replayed in the
If you want a real look at what's headed this way, ask Hideko Toyotomi.
When Japan's so-called "Lost Decade" began with a bang in the early 1990s, she was
an "OL" - an office lady - working in one of Japan's mightiest corporations and she kept her job, despite the
She was one of the lucky ones. Her employer was a mainstay electronics producer and
a key exporter, meaning the company's business remained reasonably healthy.
This time around, she's a housewife and mother. And she's worried. Her husband,
Masao, works at a local manufacturer that's cut back production to only four days a week. He's taken a part-time
job, schlepping boxes overnight at the local convenience store, to make up for the reduced pay. Their son, Daiki,
is headed for college - and for an uncertain future.
"I don't know if I have the strength to go through this again," she said. "This
time, it's worse," noting that Japan never really recovered from its "Lost Decade."
Anatomy of a Lost Decade
Having spent a substantial amount of time in Japan over the past 20 years, I agree
and I'm struck with a tremendously foreboding sense of déja
vu that I just can't shake no matter how hard I try.
What happened in Japan is being replayed in the United States - in exquisite
detail, and with a bit of agony, too. Since 2001, I've been warning anyone who would listen that the Japanese
experience was only a precursor to what we could experience here.
Naturally, that's been a controversial view, particularly since it's virtually
unthinkable for an entire generation of politicians and financiers who thought they "knew better" and that it could
never happen to us.
But lately, it's not so unthinkable. In fact, if I were to take the names out of
the Japanese experience, the story could easily be the one that's unfolding now.
In the late 1980s, Japanese companies ran the planet. A strong currency, solid work
ethic and close government connections created an unstoppable growth machine - referred to by the U.S. media as the
"Japanese juggernaut," or the "Japanese Superman."
In the interest of additional growth and financial modernization, Japan deregulated
its financial markets and began lowering interest rates. Not surprisingly, the Nikkei 225 stock index more than
tripled in less than five years, companies blossomed and the use of debt skyrocketed.
Then all hell broke loose.
At the same time, real estate values began to waver, the government figured out
that the entire Japanese financial system was a house of cards leveraged against collateral that didn't exist and
that wasn't properly valued in the first place. And the Nikkei has collapsed to where it stands today - at
one-fifth the value it had attained in 1989.
Once-stalwart companies began defaulting on loans and many went out of business
entirely. Individuals couldn't repay their debts. Real estate values fell dramatically and today remain as much as
50% below their 1989 peak. People simply turned over the keys to their homes to the banks or, like the family
immediately behind our house in Kyoto, simply disappeared in the middle of the night, never to be seen
Unemployment rose to an unthinkable 5.5%. Suicides soared. And homeless camps,
which Japan had never seen before in the post-war era, go-go years, dotted the banks of the rivers that wind their
way through major cities like Tokyo and Osaka. In our neighborhood, the Kyoto city government built a brand new
bathroom building for the children's playground only to watch as a troop of six homeless men moved in - and refused
to leave for the next four years. We also watched ubiquitous, blue-tarped "houses" appear under each bridge
spanning the scenic Kamo River.
They disappeared when Japan's economy improved in the late 1990s, or early this
decade. They're back now.
Making matters far worse, at the same time all of this was happening, deflation set
in with a vengeance and brought matters full circle. Lower prices meant lower margins. Lower margins meant lower
production and the need for lower production, in turn, created the need for smaller work forces.
Fast forward to today.
A Painful Replay
This same downward spiral that played out in Japan in the early 1990s seems to have
taken hold here in the United States. Economists called this "excess" capacity and said that a short period of
readjustment would be followed by new growth. But instead, they've gotten just more misery punctuated by a few fits
and starts of economic recovery. And the resultant record job cuts hardly point to an imminent
Even so, many people here in the United States remain in denial. They simply cannot
accept that what happened in Japan appears to be replaying itself out here. They reason that our government is
taking more aggressive action than the Japanese government did, that our corporations are better managed, that
somehow they'll pull through based on demand and, my personal favorite, that our bubble simply wasn't the same as
They're right ... it's worse.
According to a report in the Global
Mail, in 1989 the Japanese economy needed a mere three yen of
credit to make one yen of national income. Here in the United States, we've needed $8 dollars of credit for every
$1 dollar of national income. And we may need more. In Japan, the "bubble" grew for only a few relatively intense
years from 1985-1991. Here in the United States, it's been allowed to fester for 30 years.
When the Japan's bubble broke, it was a creditor nation, which means, overall,
there was more money flowing into Japan than out. At the time, Japan had $1 billion surplus on any given
When the U.S. financial crisis started, this country was running a $2 trillion
deficit, meaning we've spent that much more than we earn as a nation. Now, factoring in the stimulus plans and all
sorts of bailouts, we're arguably approaching $14 trillion.
In 1990, the Japanese were saving 17% of their income. At the moment, Americans
have practically no savings to fall back upon and our savings rate has, in fact, gone negative several times in
recent years (however, some reports indicate that U.S. savings rates have risen in recent months).
But what really makes me stop and think twice is this: At the time Japan's bubble
burst, the island nation still had extensive trade with its partners, and consumers around the world were spending.
So there was a cushion. This time around, spending has ground to a halt and there literally is no safety
Just last week, in fact, Money
Morning reported that Japan's exports were cut nearly in
half last month as the global downturn crushed demand for the country's electronics and automobiles, a development
that increases the odds that the Japanese yen could be poised for a tumble.
That, more than any reason is why the U.S. government - right or wrong - has
stepped in to become the risk taker of last resort.
While that may actually be a good thing from the standpoint of intent, it hasn't
been great from an execution standpoint.
In as much as the U.S. stimulus programs being enacted by central bankers around
the world will eventually take hold, that suggests that investors should continue to invest - albeit super
selectively - throughout this mess in a couple of areas:
- Bond markets are especially overbought and I can't think of more spectacular
profit potential particularly at the long end of the spectrum. The U.S. government may borrow as much as $3
trillion dollars in 2009 alone, and it's likely rising rates are not far behind.
- The Japanese yen itself seems ripe for a fall, so shorting both the Japanese
markets and the yen itself may wind up being an outstanding choice, especially once the reality of falling
global demand sets in.
- And, of course, infrastructure. Despite the fact that the world is pulling in
its horns, the infrastructure we use is not getting any younger particularly with regard to electricity. Even
if expansion plans are put on hold, existing grids will require repair and constant upkeep. The last thing any
government will let happen is a complete collapse of the power grid, because it would mean the end of
civilization as we know it, thanks to the social chaos that would ensue.