Tuesday, 15 January 2013

The sinking sun

When I was last in Tokyo Japan was the tiger economy that we all feared and loved. The bar at the Okura Hotel had more whiskies than anywhere else on earth - all at extortionate prices. The land of the rising sun was in fact the land of improverished whisky drinkers.

In 1989 Asset prices were sky high and a small corner of the Royal Palace in Tokyo was reputed to be valued at more than the whole of Manhattan. You can see what happen in 1991!
Similarly Nippon Telegraph & Telephone Corp. was the world's most expensive stock and a potent symbol of Tokyo's bull market. At $350 billion, the company's valuation was greater than the entire German stock market. Its valuation today is a fraction of this - $50bn, not bad after 21 years!

This asset bubble, which at one point threatened the economic dominance on the US, burst and the Japanese are still recovering. So how have they done in the current down turn? As the most experience economy in the matter of being in and getting out of recessions you might think that they have something to teach us? 

But no! They are relying on old fashioned Keynesian economics to drag themselves out of the hole they are in. And as the chart above shows, they are bottom of a pretty awful league table.

To sort this out the PM Shinzo Abe, recently approved a massive public-spending bonanza, expected to exceed ¥13 trillion ($150 billion)—more than was spent in emergency measures after the 2011 earthquake, and about 2.6% of GDP.  Japan will have to borrow the money and as one of the most indebted nations on earth, with GDP ratio that already exceeds 200%, these extra debt could push them over the edge.

The FT tells us that the additional stimulus in Japan is counterproductive because it adds to the long-term costs without addressing Japan’s real problem: a return to deflation and an overvalued exchange rate. The Bank Of Japan is pursuing a higher inflation target through large-scale purchases of a wide range of assets - quantitative easing. http://www.ft.com/cms/s/0/15aa8934-5e72-11e2-a771-00144feab49a.html#axzz2HwLCO4SK
This is bad news for us as Japan is still the third largest economy in the world (after 20 years of going nowhere) and we need them to do better at the economic stuff.  The lessons for us a pretty simple, if you have a asset bubble (as we did in the west) then there is only one way to recover, you have to let asset prices fall and deregulate to prompt private capital out of savings accounts. Increasing government expenditure, funded by more debt, is just pouring Saki on the wound.

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