An end to the Japanese lesson or Still ?

Astroboy · 5 Jan 2010

Japan has taught the world a great deal about coping with the financial crisis. Now the West is on its own

I think ... the World fully agrees that almost all advanced economies already entered into Japan's nightmare, and the Japanese lesson helped them somewhat. But they are wondering which direction to go.

Nothing more will I teach you today
That makes it very difficult to keep on drawing particular lessons from Japan's sad plight. It does, however, still leave a general lesson common to all economic disasters: don't be suckered by false signs of economic recovery. In Japan's case, such hopes have led it repeatedly to tighten fiscal policy before private demand was strong enough to sustain a recovery. That entrenched deflation. Japan also left its banks too short of capital to cope with subsequent shocks.

Policymakers in the developed world still have an enormous task on their hands. Many banks have huge write-downs to make on their loans, economies are burdened with excess capacity and households' debt levels remain high. It would be disastrous to tighten policy too soon, as Japan's example shows. But Japan provides no useful guidance on when the right time would be. For that, there is only trial and error. And the more errors there are, the more the West's next decade may look like Japan's two lost ones.
An end to the Japanese lesson

In my point of view, The Economist has well understood economic situation of UK, EU and USA at the end of the day. However, their understanding is not enough, but downplay the lesson. I think that the answer is still Japanese lesson, which is the best among possible options --- Huge government expenditure to maintain GDP; Slow restructuring banking industry to maintain employment of small-to-large-sized companies and avoid social unrest; NOT abandoning manufacturing sector even in soaring YEN.

The article says:

But there are other ways in which the pupils are in better shape. That is partly because they have less rigid systems. In the more adaptable Western economies there has been less resistance to structural changes in order to maintain productivity. There are also usually fewer political barriers to dealing with bad private-sector debts than there were in Japan. Moreover Westerners are also reaping the rewards of having acted more decisively than the Japanese did—especially when it came to pumping money into the economy and cleaning up financial balance-sheets. With fewer zombie banks, fewer signs of entrenched deflation and much earlier signs of growth, the West is in uncharted territory: it has arguably already got to a stage that Japan never really did.

In short, The Economist want to believe that Western economies are in more flexible system, fewer political barriers, less resistance to structural changes; fewer zombi banks; etc. etc. And such difference from Japan must be a hope to Western economies.

Do you agree ?

Dogen Z · 5 Jan 2010

Astroboy said:
In short, The Economist want to believe that Western economies are in more flexible system, fewer political barriers, less resistance to structural changes; fewer zombi banks; etc. etc. And such difference from Japan must be a hope to Western economies.
Do you agree ?

I agree, the West will rebound more quickly than Japan did from its quagmire because Anglo-American capitalism is more ruthless. It depends on innovation to dampen shocks to the system. And it's very good at innovation, while Japan is slow and incremental (althought thorough).

Still, I think the future will belong to Asia, China & India in particular. If Japan can integrate with that growing economic sphere, it will do good. Japan needs to decouple from its relationship with the U.S. economy and concentrate more on Asia. At least, that was the gist of the editiorial comment in Asahi Shinbum

Tokugawa Ieyasu · 7 Jan 2010

Post-bubble Japan's low economic growth had a lot to do with demographics; with a shrinking population, it's hard to generate domestic demand, hence the deflationary pressures.

However, Japan is still a formidable economic power: the world's largest creditor nation, cutting edge technologies, and huge pool of domestic savings.

I would never count Japan out.

Tokugawa Ieyasu · 7 Jan 2010

Astroboy said:
In short, The Economist want to believe that Western economies are in more flexible system, fewer political barriers, less resistance to structural changes; fewer zombi banks; etc. etc. And such difference from Japan must be a hope to Western economies.
Do you agree ?

The Economist's strength is in the long investigative articles on industries; their editorials are intellectually unbalanced, dominated by Neo-Liberal ﾂ"Free Marketﾂ" ideologues.

LLingo · 9 Jan 2010

I agree that The Economist is very much free market focused. However when we look at which economies coped best in this recession we see many economies with still relative closed systems (e.g. India, China)

Hezam · 9 Jan 2010

Is Malaysia counted ?

Pachipro · 15 Jan 2010

In a blog titled, "A global fiasco is brewing in Japan" the author warns

My intended point ﾂ― overly condensed ﾂ― was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

So it is nice to have some company: first from PIMCO's Paul McCulley, who said that the Bank of Japan should buy ﾂ"unlimited amountsﾂ" of long-term government debt (JGBs) to lift the country out of a ﾂ"deflationary liquidity trapﾂ" and raise the souffle again.

His point is different from mine, in that he discerns deflation ﾂ"as far as the eye can seeﾂ". But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan's gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. ﾂ"A global fiasco is brewing in Japan.ﾂ"

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer's illusion that all was well. This cannot continue.

It's also interesting to read the comments by people living inside and outside Japan concerning his viewpoint below the blogpost. However, I do hold with the view that since more than 85% of Japan's debt is held by the Japanese themselves and they are a creditor nation, for now, (unlike the US where virtually 100% is held by foreigners, including Japan) there is not much fear of them falling into hyperinflation as the author suggests.

If that were the case, I believe Japan would have spiraled out of control into hyperinflation long ago. The fact that they haven't shows that they must be doing something right even if it is all smoke and mirrors. What is it, if anything, are they doing to prevent/stave off hyperinflation these past two decades when most pundits and "experts" say they should already be in it or will be?

Could it be as Astroboy said above:

Astroboy said:
Huge government expenditure to maintain GDP; Slow restructuring banking industry to maintain employment of small-to-large-sized companies and avoid social unrest; NOT abandoning manufacturing sector even in soaring YEN.

If this is the case, maybe the west should take heed and follow Japan's example, but I fear that will never happen as the west always believes they are right and everybody else wrong even when someone else proves them wrong. After 20 years, Japan must be doing something right!

Astroboy · 15 Jan 2010

Tranquility of Today's Japan proves that Japan continued to be right for past decades.

In Japan, people are cool, and ordinary citizen laughed at Anglo-American rating firms as well as novel-prized economists.

Astroboy · 15 Jan 2010

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. "I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state," he said.

http://blogs.telegraph.co.uk/financ...00002951/a-global-fiasco-is-brewing-in-japan/

I can't stop laughing at this Ambrose Evans-Pritchard who has covered world politics and economics for 25 years , based in Europe, the US, and Latin America. He joined the Telegraph in 1991 ....

1. He believes that Japanese citizen purchase J-government bonds ..... This is not correct, but the fact is that Japanese banks/financial institutions are purchasing as they have more than enough deposits from people & corporations.

2. He believes ... if people get older, saving decrease... this is partly right because retired people usually live only on pension/stock of saving.... But this does not mean "saving disappear", but transferred to "others" and still staying in Japan. In other words, cash saving do not disappear even if people pass away! but just transferred to others.

As far as Japan's national balance of current account remains "surplus", there are always more than enough money in Japan, and banks need to purchase J-government bonds as money supply is always more than demand in Japan.

I think .... this is very simple logic, but almost all economists of the West don't know/cannot understand it as Japanese economy goes beyond their imagination.

Tokugawa Ieyasu · 18 Jan 2010

The guy's known primarily for his infamous "Vince Foster conspiracy theories" back in the 1990s when he was the Washington reporter for a British newspaper.

And now all of a sudden he became an "expert" on Japan?

What a joke.

Astroboy · 18 Jan 2010

Tokugawa Ieyasu said:
The guy's known primarily for his infamous "Vince Foster conspiracy theories" back in the 1990s when he was the Washington reporter for a British newspaper.
And now all of a sudden he became an "expert" on Japan?
What a joke.

Yeah. There are probably many "experts of Japan" especially in British newspapers, reporting "Japanese are illegal whalers!" "Japanese national debt is reaching 200% of GDP" "Japanese economy enters again lost decades", via thorough field research in Japan.

Tokugawa Ieyasu · 18 Jan 2010

Astroboy said:
Yeah. There are probably many "experts of Japan" especially in British newspapers, reporting "Japanese are illegal whalers!" "Japanese national debt is reaching 200% of GDP" "Japanese economy enters again lost decades", via thorough field research in Japan.

These "experts" aka intellectually fraudulent charlatans can doom and gloom all they want...

Meanwhile, the bond market continues to purchase 10 year JGB at 1.3 percent yield

Astroboy · 19 Jan 2010

Tokugawa Ieyasu said:
These "experts" aka intellectually fraudulent charlatans can doom and gloom all they want...

Meanwhile, the bond market continues to purchase 10 year JGB at 1.3 percent yield

The lowest yield of JGB indicates .... JGC is the most valuable or trustable in the world's bond market, while Anglo-American rating firm put the lowest grades.

I think ... those Anglo-American financial pundits must be frustrated with Japan as they cannot control Japan over their capitalism. That's why they try to disgrace Japan with their sophisticated approach via "Fraud Intelligence Bureau".

Astroboy · 23 Jan 2010

Dogen Z said:
I agree, the West will rebound more quickly than Japan did from its quagmire because Anglo-American capitalism is more ruthless.

You are right !

FSA Uncovers Improper Lending Practices At Banks (Nikkei)
Banks were found to have improperly handled a number of loans to businesses, according to a Financial Services Agency report.
The report is based on agency examinations conducted from April to July of financial institutions' improper moves to deny credit or reduce existing loans.
The report says a borrower was asked to put up time deposits as collateral immediately before loan approval. In another case, a firm temporarily in the red was suggested higher interest rates and had to cancel loans.
Other cases include a bank's loan application screening division instructing a branch to look at parent-only earnings results, instead of consolidated results, when dealing with clients. As a result, the branch asked a borrower to cut its loan period short.
In another case, a bank did not accept an application for a short-term bridge loan, citing a verbal agreement that the borrower's main bank is responsible for offering such a loan.
And a branch officer at a regional bank rejected loan applications at his or her own discretion, skipping proper internal control procedures.
The names of lenders and borrowers were kept anonymous.......

Very ruthless, isn't it?

Tokugawa Ieyasu · 23 Jan 2010

Astroboy said:
You are right !
FSA Uncovers Improper Lending Practices At Banks (Nikkei)
Banks were found to have improperly handled a number of loans to businesses, according to a Financial Services Agency report.
The report is based on agency examinations conducted from April to July of financial institutions' improper moves to deny credit or reduce existing loans.
The report says a borrower was asked to put up time deposits as collateral immediately before loan approval. In another case, a firm temporarily in the red was suggested higher interest rates and had to cancel loans.
Other cases include a bank's loan application screening division instructing a branch to look at parent-only earnings results, instead of consolidated results, when dealing with clients. As a result, the branch asked a borrower to cut its loan period short.
In another case, a bank did not accept an application for a short-term bridge loan, citing a verbal agreement that the borrower's main bank is responsible for offering such a loan.
And a branch officer at a regional bank rejected loan applications at his or her own discretion, skipping proper internal control procedures.
The names of lenders and borrowers were kept anonymous.......
Very ruthless, isn't it?

To paraphrase a well known film character…

"There's SLEAZE in banking? I'm shocked!"

Astroboy · 24 Jan 2010

US President Barack Obama has proposed significant new curbs on the activities of banks to try to prevent future financial crises.
BBC News - Obama pushes new bank regulation

If this reform goes real, US financial business will not be profitable business anymore, meaning that US financial industry follow Japanese financial industry - more saving/deposits from citizen but less opportunity for investment.

After all, US financial institutions will purchase more safe assets such as UST-bonds, resulting in lowering yields of 10-year bonds. And financial companies must be patient with low profit business model, like Japanese banks.

Still following Japanese lessons, I think.

Astroboy · 29 Jan 2010

S&P Threatens Japan Downgrade; DPJ Slow To Curb Debt
http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20100126D26JF660.htm

I wonder why S&P is sticking to the rating of JGB .... although nobody ask them to rate JGB.

History clearly indicates that JGB is not affected by rating of Anglo-American rating firms such as S&B, Moody's, etc. Always lowest yield means JGB is the most trustable in the world despite those ratings.

Japanese lessons clearly indicate:

1. Don't take early exit policy as deleverage of private sector will need more time than we expect.
2. Don't cut government budget/expenditure as it is only hope for maintaining GDP or economy.
3. Don't care about Anglo-American rating firms as their ratings do not affect yield of government bonds.

Tokugawa Ieyasu · 29 Jan 2010

In spite of the doom and gloom, Japan is enjoying a ﾂ"V Shapedﾂ" recovery

Upside: Industrial production, exports, trade surplus are all up, unemployment down (100,000 jobs were created in December 2009).

Downside: continued weak domestic demand-retails sales down, deflation, yen strengthening again.

Tokugawa Ieyasu · 29 Jan 2010

Astroboy said:
I wonder why S&P is sticking to the rating of JGB .... although nobody ask them to rate JGB.
History clearly indicates that JGB is not affected by rating of Anglo-American rating firms such as S&B, Moody's, etc. Always lowest yield means JGB is the most trustable in the world despite those ratings.

"conventional wisdom" about Japan has a history of not being correct. I still remember from high school area studies class that "experts" at the time thought Japan had no chance against the supposedly mighty Tsarist Russian empire.

The rest is history.

Astroboy · 29 Jan 2010

Tokugawa Ieyasu said:
In spite of the doom and gloom, Japan is enjoying a ﾂ"V Shapedﾂ" recovery
Upside: Industrial production, exports, trade surplus are all up, unemployment down (100,000 jobs were created in December 2009).
Downside: continued weak domestic demand-retails sales down, deflation, yen strengthening again.

I wonder why JPY continues to soar against USD/Euro while everybody says that Japan is 200% GDP Debt-Laden country and theoretically being in the already-collapsed.

Plus, why US/EU countries continue to follow Japan's path - those governments tend to seek exit policy when they see a little sign of recovery and plunge again - the same as Japan's mistakes.

What is your opinion ? :?

Dogen Z · 29 Jan 2010

Astroboy said:
US President Barack Obama has proposed significant new curbs on the activities of banks to try to prevent future financial crises.
BBC News - Obama pushes new bank regulation
If this reform goes real, US financial business will not be profitable business anymore, meaning that US financial industry follow Japanese financial industry - more saving/deposits from citizen but less opportunity for investment.
After all, US financial institutions will purchase more safe assets such as UST-bonds, resulting in lowering yields of 10-year bonds. And financial companies must be patient with low profit business model, like Japanese banks.
Still following Japanese lessons, I think.

Banking in the U.S. used to be a staid but proper business before the 70's when John Reed showed Citibank how to turn itself into a growth business with new financial businesses and products. Among the innovations we got global credits cards, which helped to propel Internet business. I hope financial innovations keep coming.

Also you said : "The report says a borrower was asked to put up time deposits as collateral immediately before loan approval. In another case, a firm temporarily in the red was suggested higher interest rates and had to cancel loans."

This is standard Citibank practice. Nothing wrong or illegal about it as long as the borrower is notified beforehand what his/her real interest expense will be. It's called managing risk.

BTW, rating agencies rate all available securities for all investors. Nothing wrong with that too.

Astroboy · 30 Jan 2010

Dogen Z said:
In another case, a firm temporarily in the red was suggested higher interest rates and had to cancel loans."
This is standard Citibank practice. Nothing wrong or illegal about it as long as the borrower is notified beforehand what his/her real interest expense will be. It's called managing risk.

I fully agree with you, and the risk management also exists in Japan's banking industry.
But such a risk management tend to applies to small-to-mid sized business. Risk of large financial companies looks almost nil as government back up.

Dogen Z said:
BTW, rating agencies rate all available securities for all investors. Nothing wrong with that too.

Their ratings about JGB are always wrong. Yield of low-graded JGB is much lower than high-graded UST-Bonds as well as GB Guilts.

Astroboy · 5 Feb 2010

The famous financial & politics specialist of UK quality newspaper Telegraph, Ambrose Evans-Pritchard, said ....

Fears of 'Lehman-style' tsunami as crisis hits Spain and Portugal

The Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words.

He also quoted ...

Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of ﾂ"brinkmanshipﾂ". The core issue is that EMU's credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.

http://www.telegraph.co.uk/finance/...sunami-as-crisis-hits-Spain-and-Portugal.html

I can't stop laughing at his article again. Previously he said "Japanese government's debt is reaching 200% of GDP !! and must collapse !!!", but Debts of Greece, Spain and Portugal are less than half of Japan !!! WHY we don't see financial Tsunami in hyper debt-laden Japan YET? and WHY YEN of Debt-laden country soar against Euro ?

I wish to hear an explanation of professional correspondent of the quality newspaper.

Astroboy · 6 Feb 2010

Euro debt crisis yet to prompt big investor exodus
LONDON (Reuters) - Euro-denominated assets are getting the cold shoulder from markets as worries about the stability of peripheral euro zone economies increase, but there is little sign so far of any mass flight by long-term investors.
Euro debt crisis yet to prompt big investor exodus

As Reuters said, it is too early to say investors' exodus from euro-based asset, but crisis is likely to reach euro zone as yields of sovereign debts of PIGS countries begin to rise. Southern Europe is a good market for Northen European market, typically Germany, as it can export without risk of exchange rate.
This means ..... if PIGS market go collapse, northen countries will lose their export market. Therefore, debts crisis of Southern European countries is a problem of all EU countries.

I suggest people of Germany, Holland, Denmark, etc. to purchase sovereign bonds of PIGS as they are living together under the same beautiful EU flag. Then, EU can follow Japanese lesson.

Dogen Z · 6 Feb 2010

Japanese debt

While you're making fun of other people's debt and taking Japanese debt lightly, please remember that if Japan did not have such a crushing debt, it couild have built a trans national maglev rail system, built it own stealth fighters, and added 2 more Rainbow Bridges in Tokyo Bay. (Just kidding on that last part.) But seriously, Japan can't lower corporate tax rate, which is one of highest in the world, making it difficult for companies to compete globally. We will also have to pay at least double the current consumption tax soon because Japan can't wait until inflation kicks in to pay down the debt.

An end to the Japanese lesson or Still ?

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