Tuesday, January 13, 2009

Considering Japan

Currently on my reading list is a book called Japan's Great Stagnation, I've been reading it in a piecemeal fashion so I'm still only a little way into it, but it throws up a good number of insights. I think a lot of people looking at Japan as a case against fiscal stimulus ought to reconsider their view somewhat.

First, it's worth considering the Keiretsu banking system, this system means that industrial corporations are part of a business grouping headed by a large bank, for example Mitsubishi bank is a major shareholder in Mitsubishi motors and Mitsubishi electronics (not all groupings share names in this way).

This advantage relationship means that the banks close relationship to their businesses means that finance is more readily available, the downsides are that it can lead to banks continuing to provide finance when a better move would have been to pull the plug. The other problem is that the banks shareholdings mean that they are heavily exposed to stock market falls.

And on that subject, it's worth considering the Nikkei 225's high point of 38915.87 points on December 29, 1989, it's also worth considering the Nikkei's most recent peak around 18,000 in 2006 and it's current level of 8,400. Add to this the fact that at the height of the stock boom we had a property boom of such magnitude that 100 year mortgages were a reality. Japanese property prices have fallen pretty consistently for the last 19 years.

What I'd like to illustrate here is the sheer size of the stock and property booms and size of the subsequent collapse. In relative terms the boom was far larger than the recent US and UK asset price booms.

Next it's worth looking at the demographics, it's worth noting that Japanese population growth has been slow due to a low birth rate and low levels of inward migration. The last 20 years have seen a growth in the retired population and a shrinking of the working age population (I think it's around 10% but don't have any figures to hand). These factors are worth considering when looking at GDP statistics especially given the boost inward migration gives to an economy.

Bringing it all together we've had a country that had to have it's banks bailed out in a major way as a result of being highly exposed to major falls in asset prices that have still not recovered. Compounding this it's also had a shrinking working population and a growing retired population to support. Considering how much the odds were stacked against Japan it's modest growth record (which looks a lot better if you consider it in terms of GDP per capita) interupted by a modest recession look like a pretty good achivement.

While Japan still has problems, it's massive public debt and it's current recession among them I think it is wrong to consider it a basket case or reject out of hand the action it took deal with it's problems, it certainly doesn't make a good case against the idea of a fiscal stimulus. As a final note, I'd point out that it's the country that made this, which is ace.

PS: I would also point out that it's massive debt was only possible due to the large savings by it's population. Looking at it this way the interest repayment on the national debt could be considered to be paying it's citizens pensions.

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