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"If
you delay acting,” President Obama warned Congress
this month, “you potentially create a negative spiral
that becomes much more difficult for us to get out of. We
saw this happen in Japan in the 1990s… and as a consequence,
they suffered what was called 'The Lost Decade' where, essentially…
they did not see any significant economic growth.”
Actually, Japan’s GNP grew by nearly 10 percent during
the 1990s. While such growth is meager, it was only part
of the story. Before the United States rushes headlong into
printing several trillion new dollars, with all the risks
that entails of debasing the currency it is worth considering
what was really lost in Japan’s “lost decade.”
On
the bleak side, Japan lost jobs. Its unemployment rate during
these 10 years averaged 3.6 percent which, while high for
Japan it was lower than any other country in the G-5 which,
like Japan, had to compete with the surge in cheap-labor
exports from China in the 1990s, In 1995, the midyear of
the decade, while the unemployment rate was 3.2 percent
in Japan, it was 5.6 percent in the US, and well over 8
percent in Germany, Britain France. Italy, and Canada.
What
Japan did uniquely lose in the “negative spiral”
was the incredible price froth that accompanied the 1980a
bubble. At its height in 1989, real estate in Tokyo sold
for as much as $139,000 a square foot– more than 350
times as much as choice property in Manhattan. Such valuation
made the land under the Imperial Palace in Tokyo notionally
worth more than all the real estate in California. The Japanese
stock market, with some shares selling for a thousand times
their earnings, similarly skyrocketed. Indeed. In 1989,
the notional value of the stocks listed on the Tokyo exchange
not only exceeded all the stocks in America, but represented
44% of the value all the equities in the world. When the
bubble burst– as all bubbles do– real estate
lost about 80 percent of their former value, and stocks
plunged about 70 percent. As a result, the banking system
that had extended virtually unlimited credit on pyramids
collateral based on these assets, were left, if not insolvent,
paralyzed. To the extent that the heady prices of the late
1980s proceeded from a wild flight from reality, their fall
represented a cruel regression to the norm.
On
the bright side, Japan had no inflation during this decade.
So while the Japanese could no longer relish the fantasy
that the land under their Imperial palace was worth more
than the state of California, they could now more easily
afford to buy homes, burial plots, and golf club memberships
in Tokyo. The Japanese currency also was not debased in
the crises, and a strengthening yen made vacations abroad
and foreign imports (including fuel) far less expensive.
The Japanese also continued to save. Unlike in America,
in which the personal savings declined to a mere 5 percent
in the 1990s (and became negative by 2005), Japan’s
personal savings rate remained over 20 percent, providing
some cushion of safety during this era. And Japan’s
life expectancy rose in the 1990s to over 80 years, the
highest of any major country, and 5 years longer than that
of the United States.
Nor
did Japan lose its advantage in international trade. Its
automotive manufacturers, with the help of new hybrid and
other fuel-efficient engines, gradually displaced their
American competitors in world markets. Its electronic manufacturers,
launching DVD players, digital camera, and high-definition
TVs, changed the global face of home entertainment. Its
state-of-the-art robotics and machine tool industry meanwhile
provided China with the technological backbone for its economic
boom. So even without “significant” growth in
this decade, Japan remained the second largest economy in
the world.
What was really lost in the crash was a popular delusion–
the assumption that something as transient as the notional
price of assets had enduring value. Once this illusion was
brutally shattered, not even ten government stimulus packages,
which totaled more than 100 trillion yen and caused public
debt to exceed 100 percent of GDP, could resurrect it.
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