Lessons of the 1990s recession in Japan

Original article, by Jared Wood and subtitled Is the US economy also heading for a ‘lost decade’?, via The Socialist (UK):

ECONOMISTS AND political leaders are looking to the recent economic history of Japan with growing fear. Japanese share prices are today 70% lower than at their 1989 peak, while property values are about 40% lower than they were in 1990. Economic (GDP) growth in the 1990s averaged less than 1% a year, leading economists to talk of the “lost decade”.

One of the interesting things about our current economic collapse (and yes, a drop of 35%+ with no end is sight seems to me to be a collapse) is that we can go back and compare what is going on now with what has happened before. This is particularly clear when we try to compare something that happened in another part of the world. The internet makes finding information about worldwide happenings much easier than it would have been even ten years ago.

And so the comparison of our current collapse with the Japanese economic crisis during the 90’s.

A recent report from the Swiss based Institute for Management Development draws a parallel between Japan and the situation in the US today: “Japan’s competitiveness seemed unassailable, with a strong domination in economic dynamism, industrial efficiency and innovation. Then all hell broke loose: the stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998”.

Sheesh…ours is happening, it seems, pretty much all at once! This makes the difference between us now and Japan then more tenuous, but we may well be able to connect the dots from Japan’s long slide. What can we learn from Japan’s economic distress?

The optimistic assessment of The Economist (21/8/08) is that: “By learning from Japan’s mistakes, America can avoid a dismal decade”. It is more realistic to say that while the US can learn from Japan in some respects, overall the US enters its financial crisis in a far weaker state than was the case in Japan in 1989.

We’ve built up all of the problems which hit Japan over a decade. This is why we’re in a weaker place in responding to our economic crisis. I suppose we can blame that to a great extent upon the globalization movement in addition to the overriding greed of the bosses.

The Japanese recession was triggered by a build-up of bad debt in the country’s banking system. Like the US today, money had been borrowed using inflated property values as security. Also like the US, the world was assured that safeguards were in place and that any failing bank would be helped out by others, through what was known as the ‘convoy system’.

Read back, and you’ll find that this is often the reason for economic collapse. I was reading about the panic of 1907 today, and it seems that the exact (well, quite similar) problems occured then. It seems the booses greed never learns!

But neither the convoy system nor securitised debt could withstand a fall in property prices combined with a growing rate of default by borrowers. The Financial Times reported, at the beginning of this year how “Japan’s 1990s banking crisis has gone down as one of the worst in history, generating a staggering $700 billion of credit losses”, adding: “And since then, Wall Street financiers’… confidence in American finance was so high that in recent years Washington officials have regularly travelled to Tokyo to “tell the Japanese what to do with their banks” (FT 1/1/08).

Wood points out that we have our own $700 billion worth of credit problems, but also staring at us is the $62 trillion in derivatives (leveraged out to $600+ trillion). We both stare at the huge numbers and shudder at the place we have been led. I’m sure the Japanese did, too (well, much the same as our banksters, perhaps too late).

But this is clutching at straws. Throughout the recession Japan’s economy had been supported by its successful export sector, which has continued to deliver a balance of trade surplus. This means that domestic weakness has been offset by the proceeds of trade with other countries, in particular the USA.

Ah, here’s the kicker. Our manufacturing has been devastated as our economic wizards searched around the world for the lowest waged workers. Japan had a fundamentally sound manufacturing base that hadn’t been so stripped. Our balance of trade looks as bad as our ever increasing debt. We don’t have the manufacturing capability to help pull us out of this hole we’re in.

Also, because of the high level of savings in Japan, consumers were able to reduce their savings ratio from 15% before the crisis to 5% a year during the 1990s. In other words, the Japanese increased spending from 85% to 95% of incomes. In the US the savings ratio is already only 2%, meaning current expenditure is reliant on the very debts that cannot now be repaid.

Well, we have lots of stuff we can sell on Ebay to save the country!

As if this is not enough of a challenge, there is evidence that the property price bubble in the USA is even further ‘over-inflated’ than was the case in Japan.

Which means that there is farther for the US housing market to fall. Houseing, to a great extent, has been the driving force of the domestic economy for the whole of the Bush administration. Now, that cash cow has been wounded and needs to take time to heal.

The Financial Times has joined others that are in a state of denial over the current crisis. “Consider the following. Japan suffered a collapse in equity and property prices every bit as dramatic as the 1929 (Wall Street) crash. But it did so without the subsequent hardship of the Great Depression. Certainly, growth was weak throughout the 1990s, but at a real average of more than 1% a year. Unemployment rose to post-war records. But at a peak of 5.5%”.

We’re already officially past that point, and worse is almost certainly to come. Unofficially, we’re over 10% unemployment (measured before we changed how we counted unemployment during Bubba’s administration). Public works is a way to bring ourselves out of this hole, but will we be able to afford doing so?

As usual, it will be working class people who will be expected to pay through higher taxes, wage cuts and unemployment. The lesson of Japan is that if the world’s most dynamic and productive economy has not been able to recover from the debt crisis of 1989 then capitalism has well and truly failed. Capitalist euphoria during the 1990s has masked this but only served to rack up yet more unsustainable debt.

Keep this in mind as you head to the voting booth in November. Both of our major parties are part and parcel with the bosses on the economy. They can find $1+ trillion to bailout the bosses. Will there be a similar amount to help out our servile masses? Only time will tell.

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  1. On the other hand, we got L’arc-en-Ciel out of the lost decade.

  2. America has just HAD a dismal decade!  In every sense, most definitely including the economic, America has been adrift for many years–since Reagan, at least.  But I voted “no” about whether we’re “headed” for a lost decade, because the decade or two we will now spend cleaning up corporate capitalism’s mess won’t qualify as “lost,”but “remedial.”

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