Semi-Daily Journal

Japan went through a housing bubble. They inflated prices in Japan and other places such as Hawaii. Japan is very susceptible to oil shocks. The current global instability cannot be good. With little natural resources and manufacturing shifting to other parts of Asia, Japan has little comparative advantage other than their highly educated population. Even their they are hindered by language problems that the Indians do not have. There is little hope for Japan reversing its fortunes in the near future.

I tend to agree with you, bakho, except to note that Japanese society has at previous times of extreme crisis, like in the mid 19th and mid 20th centuries, shown a remarkable facility to rapidly pivot and undertake radical change. They may do so again, although their rapidly aging population, and near-constant, historically speaking, aversion to immigration may make their latest challenges much more problematic to adapt to.

As recently as the mid-20th century and certainly in the 19th, far more of Japan's workforce was on the land, relatively poor and with few expectations of public intervention in any aspect of thier lives. At those times, demographics were also far more favorable to growth. I have to wonder whether there have not been sufficient cultural changes in Japan (as in most less-traditional societies) to make prior performance an uncertain guide to Japan's ability to face challenges now. I have seen it suggested that the big lesson learned by Japanese bureaucrats since WWII is to look like you are taking action to deal with big national problems, while in fact staying out of the way to let problems work themselves out. That might be the right answer, but it means the government is unlikely to be a source of change.

What about the fact that the lack of transparency in the Japanese stock market makes investors feel like it is too difficult to guage risk?

Boy, I'd hate to have that problem here.

Say Hey -

What would be the p/e ratio of Cisco if options were expensed? Ah, for transparency.

I read a theory that Japan's growth was driven by exporting to more and more markets around the world, and that they've simply run out of new markets. Any responses?

I read a theory that Japan's growth was driven by exporting to more and more markets around the world, and that they've simply run out of new markets. Any responses?

The Japanese problem was not running out of export markets, but failing to use monetary policy to stimulate a slowing economy. Deflation set in, and "domestic" demand has been a problem ever since. Paul Krugman began to write about this years ago. Japanese monetary was awful. Fiscal policy was also rather poorly applied, though it kept up what Japanese growth there has been.

I wonder if Japan could spur the spending of the insane (relative to the US) savings of it citizens? I heard the average savings is around $100k US per taxpayer. This averages to roughly $1 Trillion US dollars sitting in accounts that garner little interest.

Flaffer

Why don't they just cut taxes for the rich? That should fix everything. Right?

Actually, this could be a blessing in disguise for Japan. Historically, Japan has always been resistant to change. If the Japan government can't find some stopgap measure to artificially support the stock market, and it goes down to 7000 or so, the banks may not have sufficient capital adequacy ratios. The resulting chain reaction could be chaotic. While Japan has a way of eventually rising out of crisis, it seems unable to change without severe crisis.

Note 1: I have seen a lot of whining about the stock markets, but no insights on how to profit off of it. I beleive Keynes did quite well for himself around the time of the depression. I guess those types are keeping quiet so nobody will spoil their party. Krugman did say to lock in the low interest rate, but I have no debt so I can't do this. I guess I'll just be debt free but broke by the end of this storm.

Note 2: I think 3M shares are doing OK relative to the general market. Nothing like having www.ready.gov to advertize your products.

Note 3: Find companies with good stable cash flow who pay dividends and have low stock prices.

'I read a theory that Japan's growth was driven by exporting to more and more markets around the world'

Well they did do what they called 'torrential rain' exporting, I can even remember when the UK had a motor-bike industry, and on one account what they're suffering is mercantilism's revenge. For sure all those dollar sitting in New York accounts don't do much for domestic demand. But I think the problem goes much deeper.

For starters, the banking stsyem is completely bust. The question for the end term paper is: is there deflation in Japan because the banking system is bust, or is the banking system bust because there is deflation? Discuss.

By the way, one important point. Japan is suffering slow-burn deflation. Circa 1% per annum and sustained. That already should give a us a warning that simplistic comparisons with what happened in the US circa 1933 may or may not help. (Sorry Ben!).

"The Japanese problem was not running out of export markets, but failing to use monetary policy to stimulate a slowing economy."

This seems to be the biggest fallacy of the lot. Japan has in fact created the monetary equivalent of a 'black hole'. The more they print, the more the velocity of circulation seems to slow down. There is a very curious division of opinion between those in Washington and New York who have limited knowledge of the Japanese situation and assume the whole problem is a monetary one, and those inside Japan who see things very very differently. eg Morgan Stanley's Robert Alan Feldman:

"So we get back to the debate on what monetary policy should do. For those who think that ending deflation simply means lowering rates a lot and/or printing a lot of money, Japan’s experience should toll a warning bell. Base money is up by 80% since 1997, while deflation has continued. Even monetarists in Japan now agree that the collapse of money velocity cannot stop without structural reform."
http://www.morganstanley.com/GEFdata/digests/20030310-mon.html#anchor3

The 'dangerous' idea here is that there are two equilibria available, a good and a bad one, and that Japan's only problem is that it's stuck in the bad one. Would that things were so simple. The Japanese objection that even a fool (remember the 'foolproof' way - easy, you just drop money out of helicopters right) could create inflationary expectations for a couple of years, the problem is to sustain them. Absent this capacity the cure might well only make the patient worse. It is here that the analogy between US acute deflation in the 30's and Japan's chronic (arthritic?) deflation in the 90's breaks down.

Somebody earlier-on mentioned property. I have a feeling that the steady appreciation of property values in the 70's and 80's and the collapse in the 90's has its part to play in telling the story. Of course the story can also be spiced up by giving the property angle a demographic twist.

"Japan has little comparative advantage other than their highly educated population"

Yes, but it's precisely the value of this education that changes as the population ages. Education is not an absolute. These days it's more about capacities to assimilate new ideas, and adaptability on-the-fly to changes. Both of these could be considered to carry a high youth premium.

"Mr. Koizumi said he ordered Economy and Banking Minister Heizo Takenaka to ensure that a financial crisis will not occur, even when faced with "unexpected developments.""

Brad, this takes me back to a debate we had last week about the FT. I'm sorry in the WSJ and Dow Jones, well there's something missing (I hope it's not in the "frontal lobe region"). You American's may have the best economy on the planet, but you certainly don't have the best financial journalists. I mean, anyone who could write this 'sin mas'........I mean Koizumi 'ordered' anybody to do anything. A good introductory 'guide for the perplexed' on Japan: Karel van Wolferen's 'The Enigma of Japanese Power'.

A lot of people would have been better off if they had read Wolferen's book when it was first published.

David, economic studies have indeed shown that Japanese economic growth has come almost entirely through its export sector over the last 30 odd years.

Wanna know what the problem is? I'll tell you what the problem is!!! (he said, in his best immitation of some other regulars)...

Mainichi Shimbun's web site reports that Japan's government and the Bank of Japan has decided to launch a regular "top-level forum" to talk about how to fight deflation. The first meeting will be convened shortly after Toshihiko Fukui assumes the governorship of the BoJ on March 20. (Presumably to get the current, less flexible governor on his way to retirement before bothering to discuss Japan's most pressing economic problem. This is March 12, 2003. When did Japanese officials first admit deflation might be a problem? Prior to that, when did others identify deflation as a problem (ask Krugman)?

I tried to post in this series once before, to no avail, to note the Japanese tendency, at least since WWII, to pretend to do something about problems while allowing them to run their course. Today's headline prompts me to try again.

I'm no expert on Japan, but I think Edward Hugh's comments here are right on target. Deflation is only a symptom of Japan's sickness, not its cause. Whether you are Paul Krugman or one of the few monetarist fossils left in the economics profession, the simple fact to be accepted is that expansionary policy in Japan will not work until the financial system is reformed--new fiscal spending will simply rot in the bank accounts of government contractors and new bank reserves will also rot because few businesses wish to borrow and even fewer banks wish to lend.

Everything that I've read indicates that Japan can only clean up its mess by tightening its accounting standards and getting some very ruthless auditors to mercilessly write off non-performing loans, if necessary having the government recapitalize banks as much as needed in order to stave off financial collapse. Only then will Japanese financial institutions lose their pathological fear of lending--the resulting recovery of confidence will be the only thing that will restore money velocity to healthy levels.

Of course, recognizing such bad loans also involves a huge shakeup in all banks' and corporations' executive structures. Lest one judge Japan too harshly, I don't think U.S. banking and corporate executives would have the guts either if they were faced with a similar deflationary mess.

Well, in theory at least, when there is a capacity glud preventing overheating and a Yen glut insn't helping...you could always resort to a supply side shock.

Like, say...oil prices, for instance.

Japan imports oil, presumably, and so they will have some inflationary pressure, at least temporarily. Of course, this doesn't mean that they can ignore the structural problems.

Well, in theory at least, when there is a capacity glud preventing overheating and a Yen glut insn't helping...you could always resort to a supply side shock.

Like, say...oil prices, for instance.

Japan imports oil, presumably, and so they will have some inflationary pressure, at least temporarily. Of course, this doesn't mean that they can ignore the structural problems.

Has any economist run through the figures on possible consequences of a declining population? Japan is only a little ahead of many European counties, and may be a harbinger. European economy is not all that healthy. The US with its huge immigration has so far escaped, but I do not see the future, esp given current anti-tax sentiment as promising.