Japan – the lost decade: bubble economics

Japan is the second biggest industrial economy in the world. In the 1980s it experienced a huge speculative bubble, just like the housing bubble that has burst in the USA and is on the point of bursting in Britain now. When the bubble burst, the Japanese people, who up till then were regarded as living in a ‘miracle economy,’ experienced a decade of recession - a ‘lost decade’.

Japan is the second biggest industrial economy in the world. In the 1980s it experienced a huge speculative bubble, just like the housing bubble that has burst in the USA and is on the point of bursting in Britain now. When the bubble burst, the Japanese people, who up till then were regarded as living in a ‘miracle economy,’ experienced a decade of recession - a ‘lost decade’. Hillary Clinton has warned in the USA, “(We) may be drifting into a Japanese-like situation.” Could it happen again?

After the Second World War Japanese capitalism was a smoking ruin. But within a few years it had reconstructed itself and by the 1950s was growing at an annual rate of 10%, a speed which no other capitalist nation had achieved till then. This growth was export-led. Japan was widely recognised as an economic miracle. Rivals muttered bitterly about the ‘yellow peril,’ sensing that a great capitalist nation was emerging.

Japan was a different type of capitalism from the Anglo-Saxon model. Firms were organised in groups called keiretsu, held together by an interventionist bank or banks. The banks provided the funds for long term investment, under the direction of MITI, the Ministry of International Trade and Industry. These banks were like the German banks described by Hilferding in his book Finance Capital, which influenced Lenin when he wrote Imperialism, the highest stage of capitalism in 1916. By contrast British and American banks were historically unconcerned with industry and reluctant to lend long-term to manufacturers.

After 1945 world trade was conducted by means of fixed exchange rates against the dollar, which was the world’s reserve currency. For much of this early post-War period there were 360 yen to the dollar. This proved to be a very competitive rate, central to Japan’s export success.

 It was for a time the most competitive capitalist nation in the world and built up huge surpluses with other countries, particularly the USA. The emergence of dynamic capitalist powers such Japan and Germany challenge the US hegemony. Eventually the edifice created at Bretton Woods cracked, as the international balance of forces changed in the course of the post-War economic boom. The USA, no longer able to pay its bills, floated the dollar in 1971.

The world moved to a floating exchange rate system. The yen appreciated and exports became dearer and less competitive. By the mid-1970s the dollar would only buy 210 yen, not 360. By 1988 it bought just 120 yen. Japan was still able to achieve 5% growth rates throughout the 1970s, and 4% in the 1980s, but the rising yen was hurting.

Under Reagan, the American economy was in a worse and worse state. At the Plaza Accord in 1985 the Americans decided to pistol whip their ‘trading partners’ and rivals into letting the dollar slide and pushing up their own currencies in order to correct the US deficit. This meant putting the yen sky high.

Japanese banks had their arms twisted to liberalise, to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more. (More recently our house price bubble fuelled the uncontrolled lending splurge in the same way.) Interest rates in Japan were slashed from 5% to 2½ %. The Japanese government supported this as they felt it would stimulate growth at home now the export market was under threat.

Liberalisation led to two classic bubbles. Borrowing drove prices up for land and for shares. From 1985 to 1990 land prices soared. By the end of this period the land beneath the emperor’s palace was ‘worth’ more than the whole of California. Land in Japan was ‘worth’ more than all the land in the rest of the world put together. Sky high land prices are not good for business. “At the height of the land price explosion the market value of the land owned by the non-financial corporations (NFCs) exceeded the value of the machinery, buildings and inventories, thus halving the profit rate and bringing it to a very low level by the end of the boom.”  (Andrew Glyn Capitalism unleashed p. 141)

At the same time the Nikkei share index soared to 40,000. We can see now that all this was madness. Yet people who can see this clearly in the case of Japan were unable to spot that the recent house price boom in the UK, the USA, Ireland and Spain was also a bubble.

The bubble in Japan did stimulate economic activity for a time. In the late 1980s Japan was regarded as a world leader in cars, in consumer electronics and in robotics. Commentators began to talk about a ‘new paradigm.’ The next time the phrase was used was during the IT share price bubble that burst in 2001. When the sages speak of a ‘new paradigm’ it’s time to sell the shares!

While the bubble is blowing up, people feel rich. They’re actually living in a house of cards. When the bubble finally bursts they really do get poorer.

It was rising interest rates that pricked the bubble, which burst on the last day of 1989. Over the next few years asset prices fell in Japan as much as they had done in the Great Depression worldwide. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ It was at 15,000 in 1992 and 12,000 by 2001.

More important the modern dynamic Japanese manufacturing sector could generate growth of only 1.5% a year over the decade. Business investment in 2002 was no higher than it had been in 1990. There was indeed a lost decade.

The evaporation of paper claims to wealth had real effects on people’s income. As land prices collapsed, the banks found they didn’t have enough capital backing for their loans and reined in lending. But the ‘main banks’ of the keiretsu were too committed to the firms they serviced to drive them to the wall. Japan stagnated, but production did not collapse.

It will be interesting to see if the Anglo-Saxon banks, committed to nothing but feathering their own nests, will be as reluctant to enforce bankruptcy on insolvent firms in the future; or whether these banks will just collapse from their own profligacy, bringing chunks of industry down with them.

The government had connived at the blowing up of the bubble. But they couldn’t magic away the consequences. In the same way Bernanke in the States is now engineering below inflation interest rates to reflate the bubble in the housing market. He realises that the alternative – a banking collapse – doesn’t bear thinking about. But capitalist bubbles - once they have blown up - are not under the control of the authorities.

The Japanese government tried hard. It tried Keynesian methods of spending money it didn’t have and cutting taxes to get consumers back in the shops. This fiscal boost was worth 1% of Japan’s (big) GDP every year. The government spent 100 trillion yen in ten years. A lot of this money went to construction firms linked to the ruling LDP or to rural projects benefiting the traditional LDP-voting farmers. All that happened from the boost is that the government was lumbered with a massive deficit by the end of the decade Japanese national debt was 182% of GDP last year. The real situation is probably worse. The Japanese national debt is a murky affair, supplemented by all manner of slush funds and off-balance sheet transactions.

They tried monetary policy, reducing interest rates to just ½ %. (Are you reading this, Ben Bernanke? This is what you’re trying now. It didn’t work then.) The Japanese weren’t attracted into borrowing by these low rates. They just led to the development of what became known as the ‘carry’ trade. Speculators borrowed money at very low rates in Japan and invested in other countries such as the USA, where returns were higher. You can take a horse to water, but you can’t necessarily make it drink. Capitalism is essentially an unplanned system. It can’t be controlled. The Japanese boom and its aftermath are a warning to us all.

Source: Socialist Appeal UK