[R-G] Can We Avoid the Years of Stagnation Suffered by Japan?

[CeJ]

The answer to the rhetorical question of the Independent newspaper
article might best be: YOU SHOULD BE SO LUCKY!

There is a niche speciality in UK journalism whereby an article
displays little knowledge about Japan and then proceeds to more or
less gloat over the 'fact' that the UK or even 'the West' is not
Japan.

Not a whole lot about that article made much sense, but let's look at
a few of the idiocies that were apparent to me (having lived in Japan
for 18 years and lived through the various crises, including watching
my bank be forced into bankruptcy and then my insurance company--the
holder of my private pension that I had been recommended to pay into).

 >>Homelessness has increased, one third of jobs are part-time, and
the thing they found most shocking is that quite a lot of people have
no health insurance because they cannot pay the low social security
charges to maintain their cover.<<

That's not half of it. Many people try to avoid paying into the public
scheme available through the city hall because the amount is based on
the previous year's salary. So if you earned a lot of reported income,
your costs go very high--like 600 dollars a month (though that looks
cheap compared to a private health insurance in the US). And the
scheme is really two things at once. Basic health insurance and a
basic retirement. So a lot of people, both Japanese and foreigners
working here, try to avoid paying into any scheme at all. It's
government and company workers who are forced into the schemes--which
by the way has also lead to a lack of unity or coordination across all
the different possible ways one might get health insurance. I have
worked in Japan for the 18 years I have lived here, and yet my 'social
security' is split up into three different systems because my jobs
changed and I couldn't take one scheme with me. To make matters worse,
the government has cut the benefits of health insurance here, leading
to many people taking out supplementary policies to cover the 30% of
medical charges not covered  by the basic insurance. By the way,
companies like AIG (now bankrupt) flocked to Japan to make huge
profits off this supplemental coverage market.

>>Why can't the Japanese government do anything about this? Because it hasn't got the money.<<

True, it's got worse government finances than Italy--and now
Botswana--but it has got high internal savings, and a lot of this
savings goes directly or indirectly into propping up the government
bonds, which means Japan is as free to print money as the US is, even
if the US gets this privilege from a totally different position in the
'world system'.

>>If there seem to be alarming parallels with our own situation in Britain, or indeed with that of most EU members and the US, there are solid reasons why our prospects look better than those of Japan in
1990.<<

Given the way this is a worldwide crisis that has engulfed the EU, why
does this look like wishful thinking?


>> More of those in a moment. First what can we learn from Japan's experience? The first is that cutting interest rates and boosting public spending will not of themselves solve the problem. <<

But the article doesn't explain why not. I have a theory. One, the
public spending was insufficient and went to projects with limited
'knock on' effects. Two, more importantly, since so many Japanese
households (especially the numerous and growing numbers of retired
people) rely on their lump sums of savings in order to live and
consume, the ultra-low interest rates of the past 15 years have only
guaranteed one thing: these people are on fixed incomes, their savings
earn nothing, so they spend less and less (in the face of current
inflation).

>>Japan did both, with near zero interest rates for 20 years and the huge public borrowing noted above. The government spent on supposed "pump-priming"
schemes, building new bridges, roads and rail links, but while this
pumped things up for a bit, it failed to establish sustained growth.<<

A lot of that also had to do with the huge fluctuations in the value
of the yen. When the yen appreciated, stayed appreciated, and oil got
very cheap in the mid to late 90s (due to over-production from Iraq
which drove benchmark quality oil's price way way down), Japan
experienced not just asset deflation but commodity price deflation.
Things got cheaper (also due to shifts in manufacturing from Japan to
China). So even if you bought more in physical terms, measures of
consumption seemed to indicate less was being consumed and spent.

>>A further mistake of the Japanese authorities was that they tried to prop up depreciating asset prices, including the stock market. They had a plan called the price keeping operation or PKO, which used public money to buy shares on the market and so stabilise the price.<<

Not very accurate. First it has to be remembered that the government
owns a lot of shares due to the lackluster results they got in
privatizing former national companies, like Japan Rail. So this was
more like them using public money in a stock buyback plan. The Nikkei
average tanked in the early 90s and has stayed for the most part
totally tanked.

>>The joke at time was that it should not be called the PKO but the PLO, or price lifting operation.<<

I don't get the humor, sorry.

>>So from a British perspective, we are on the right track in forcing the banks to disclose their rubbish loans and then replace their capital, if necessary by getting it from the state. <<

Which is exactly what Japan did to its 'failed' banks. Many of the
failures were simply contrived by the government in order to force the
banking and financial sector to get ready for the brave new world of
post-big-bang liberalization and deregulation (apparently no
regulation that would limit risk). And once banks were forced into
bankruptcy and public holdership, the government then proceeded to pay
large amounts of money to get American private equity groups to take
them over (with the hopes that they would also brings some elite
Japanese on their private equity coattails along for the post-big-bang
ride).


>>But we are in danger of making the same mistake as Japan if we boost public spending to try to pump-prime the economy with a big spending programme.<<

No real explanation is given. But if the UK bank failures are largely
contrived over issues like capital adequacy ratios than anything else,
then maybe the UK doesn't even have the first part right.

>>Mercifully there are some reasons to suspect that the UK and European situation may be more manageable than that of Japan 20 years ago. Our property bubbles have been smaller, relative to GDP, than Japan experienced, and asset prices are being allowed to fall rather than
being artificially supported by the government.<<

Yet the UK, Spain and the US seem particularly plagued by an asset
bubble in homes, housing units, condos, etc.
And believe me, asset prices have fallen and fallen in Japan. They are
not so much propped up by the government as simply held onto (despite
their loss of value) by a small elite than owns most things in Japan.
Their philosophy is if they can't sell it on for a profit, they will
depreciate it in accounting terms and pass it on to the next
generation (and remember, Japan's social dynamic outside of Tokyo and
Osaka and Nagoya--the rest of the country most foreigners know nothing
about, is largely based on the older generation passing on property
and wealth to the eldest male heir to keep the household going).

>> Our banks are now no longer concealing the extent of their losses, as did the Japanese, and as I am afraid they themselves have done in the first part of this year.<<

How does the author know this? I'm looking at information like
Abbey-Santander saying it's one of the most profitable banks in the
world (meaning they make their shareholders happy) while at the same
time I'm reading how over-exposed Abbey is to bad loans in housing in
the UK while Santander (the mother company) is overexposed to bad
loans in housing in Spain (and much of that goes back to citizens of
the UK buying condos in Spain). And then I see information like, oh,
and by the way, Santander has 80 billion dollars in debt coming due at
the end of 2009.

I say again, the UK , the US, EU and now the rest of the world might
appear lucky if they get through this crisis like it was Japan and the
'Asian flu' of 1997. Which brings me to the moral of my story. Back in
the late 90s to 2000, when oil was cheap due to overproduction, what
did Greenspan worry about the most? DEFLATION like what was gripping
Japan. So rather than work on deflating the obvious bubbles of the
US-UK, he helped to inflate them still further. Then, in 2001, when it
looked to come completely undone, he and the Bush regime re-flated the
bubbles and gave the US a huge wack of military spending to add to the
mix. Meanwhile, all those trade surpluses from the ME and E. Asia came
pouring in to finance the bubbles in the US and UK while financing the
Bushwa's war on terror.

When the speculative bubble on oil came undone (with oil prices going
drastically downward), I would bet the crisis we see now was largely
caused by ME trade surplus money going into refuge investments. Which
then unhinged the financial houses that oversee the finance economies
of the US and UK. And then we got to see decoupling and derailment
after decoupling and derailment.

CJ