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  • Japanese Depression?

    They slid 3.3% last quarter, 12.7% annualized. That's ugly. Japan used to be the wonder economy of the world, where did everything go so badly wrong? Low population growth rate is a given, but what else?
    Japan's economy in quarterly dive

    Japan's economy contracted by 3.3% in the last quarter of last year - its worst showing since the oil crisis of the 1970s, official figures show.

    The contraction means the economy shrank at an annual pace of 12.7% during the October to December period.

    Economic Minister Kaoru Yosano said Japan faced its worst economic crisis since the end of World War II.

    The slowdown in the world's second-biggest economy is steeper than that being experienced in the US or Europe.

    Japan has been hit particularly hard by falling global demand for its products.

    Exports, particularly of electronics and cars, have slumped and production has been slashed.

    Consumers have cut back too, alarmed by rising unemployment.
    http://news.bbc.co.uk/2/hi/business/7891849.stm
    "Every man has his weakness. Mine was always just cigarettes."

  • #2
    All economies that are export driven suffer badly. Japan's is heavily export driven.

    Other than this, the Japanese Yen has gone up in recent month, and the domestic spending has stagnated. All these factors seem to have made the Japanese recession worse than others.

    Comment


    • #3
      Originally posted by Ironduke View Post
      They slid 3.3% last quarter, 12.7% annualized. That's ugly. Japan used to be the wonder economy of the world, where did everything go so badly wrong? Low population growth rate is a given, but what else?
      Japan economy was in trouble since late 1980's. Japan long stagnation in 1990's is a nightmare for US economists now, because situation might be very similar in US.
      So this crisis was just a final blow.
      Winter is coming.

      Comment


      • #4
        I believe a part of the reason is due to their powerful rice lobby. They devote a large chunk of the land to plant rice. Japanese rice is very expensive compared to other countries' imports, especially American rice. It's protectionism at its finest.

        This farm land could have been used for other items. Be it development (making houses cheaper) or industrial (make more stuff cheaper).

        Japanese spent more money on rice, therefore less money on other things.

        Expensive living makes children not worth their time. Population ages and decreases. This further dampening demand and innovation.

        Japan is a dying nation.
        "Only Nixon can go to China." -- Old Vulcan proverb.

        Comment


        • #5
          The natural of the Japan political system leaves PM with very limited power to make decisive actions, from what I understand.








          Japan’s GDP Shrinks 12.7%, Most Since 1974 Oil Shock (Update3)
          Email | Print | A A A

          By Jason Clenfield

          Feb. 16 (Bloomberg) -- Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, as recessions in the U.S. and Europe triggered a record drop in exports.

          Gross domestic product fell for a third straight quarter in the three months ended Dec. 31, the Cabinet Office said today in Tokyo. The median estimate of 26 economists surveyed by Bloomberg News was for an 11.6 percent contraction.

          Exports plunged an unprecedented 13.9 percent from the third quarter as demand for Corolla cars and Bravia televisions collapsed amid a slump that the Group of Seven nations said will persist for most of 2009. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk a decline in household spending will prolong the recession.

          “The economy is in terrible shape and the scary part is that we’re likely to see a similar drop this quarter,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “All we can do is wait for overseas demand to pick up.”

          The Nikkei 225 Stock Average fell 0.2 percent at the lunch break in Tokyo, extending the year’s losses to 12 percent. The yen rose to 91.62 per dollar from 91.76 on speculation Japan will refrain from taking measures to weaken the currency. The yen’s 18 percent gain over the past year has compounded exporters’ woes by eroding the value of their overseas sales.

          Worse Than U.S., Europe

          The world’s second-largest economy shrank 3.3 percent from the third quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the euro-zone’s 1.5 percent decline, which was the sharpest in at least 13 years.

          “There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”

          G-7 finance chiefs meeting in Rome last weekend vowed to tackle a “severe” economic downturn.

          Japan has been in a recession since November 2007, according to a government panel that dates the economic cycle. The Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. worsened a credit crisis that erased more than $14 trillion from global equity markets and paralyzed world trade.

          Yosano said the government has no plans to compile additional stimulus measures before next fiscal year’s budget is passed. Parliamentary gridlock has blocked the passage of Prime Minister Taro Aso’s 10 trillion yen ($111 billion) package, helping his popularity slide ahead of elections due by September.

          Unpopular Aso

          Aso’s approval rating fell to 9.7 percent, the poorest showing since the Yoshiro Mori administration in 2001, according to a Nippon Television news survey.

          The Bank of Japan, which in December cut its key interest rate to 0.1 percent, is trying to get credit flowing by purchasing shares and corporate debt from lenders. It has little means to address what analysts say is the economy’s central problem: a lack of overseas demand.

          Net exports -- the difference between exports and imports -- accounted for 3 percentage points of the 3.3 percent quarterly drop in GDP.

          Japan has become more dependent on sales abroad for growth over the past decade. Overseas shipments make up 16 percent of the economy today compared with about 10 percent in 1999.

          “Japan produces high-end durable goods, which are very, very sensitive to credit conditions,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “People normally borrow to buy these things. In that sense, too, Japan was vulnerable.”

          Spending Less

          Domestic demand, which includes spending by households and companies, made up 0.3 percentage point of the contraction.

          Capital investment fell 5.3 percent. Manufacturers cut production by a record 11.9 percent in the quarter, indicating they have little need to buy equipment as factories lay idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent, as exporters fired workers.

          Panasonic Corp., Pioneer Corp., Nissan Motor Co. and NEC Corp. announced a combined 65,000 job cuts in the past month. The eliminations may have pushed the recession into a “new phase” in which consumers become more defensive and spend less, according to Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

          Sentiment among households is close to the lowest level in at least 26 years. The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades.

          “The best we can expect for this year is to see the collapse stop,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. For Japan to recover, “we’ll need the U.S. and Chinese economies to take off first.”

          Without adjusting for inflation, Japan shrank 1.7 percent from the previous quarter, less than the 2.1 percent analysts estimated. The GDP deflator, a broad measure of price changes, rose 0.9 percent, the first increase in a decade.

          To contact the reporter on this story: Jason Clenfield in Tokyo at [email protected]
          Last Updated: February 15, 2009 21:11 EST
          “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

          Comment


          • #6
            Here is one view from Business week


            Bureaucrats Out of Touch

            Critics and the Japanese public (who have given Prime Minister Aso approval ratings of just 10%, according to one recent TV poll) say Japanese government must take its share of the blame. Even by Japan's low standards, the political response to the current crisis is disappointing. The biggest criticism is that Japan's politicians and bureaucrats, shielded from the worsening realities of everyday life, appear unable or unwilling to do anything address the country's spiraling problems. "It's as if after Keynesianism and monetarism, we are now trying a new paradigm: fatalism—whatever the world does to Japan, there's almost no attempt to do anything about it," says Richard Jerram, chief economist at Macquarie Securities in Tokyo.

            Aso's difficulty in passing a fiscal stimulus bill is one example of Japan's political deadlock. While the U.S., China, and European countries have agreed to large expenditures to bolster slumping economies, parliamentary gridlock in Tokyo means that the $111 billion economic stimulus plan proposed by the ruling Liberal Democratic Party late last year is still on hold. Even if it passes, critics point out it is small compared to President Obama's $789 billion plan and China's $560 billion plan. That's despite a surge in unemployment, which Barclays Capital estimates will reach 5.7%—more than the 5.4% peak following the collapse of Japan's bubble economy in the early 1990s. "In terms of job creation, the government isn't doing what it is supposed to do," says Kyohei Morita, Barclays' chief economist.

            Monetary policy options are more limited. Having been slow to raise interest rates from near-zero when the economy boomed, the Bank of Japan has had little leg room to make big interest rate cuts. As the economy has slowed, Japan's base rates have fallen from a recent peak of 0.75% to 0.1%. That's far less than the steep cuts undertaken in the U.S. and Europe and another factor in the yen's surge. Nevertheless, economists say additional measures being undertaken by the Bank of Japan, such as plans to buy corporate stock holdings from banks and special credit measures for business, aren't enough to halt Japan's slide.
            Missed Opportunity on Yen

            Japan's authorities have also failed to curtail the yen's rise. In late October, the Group of Seven issued a statement, which some interpreted as implicit backing for Japan to step in and attempt to stem the yen's rise. Japan's Ministry of Finance, however, chose not to intervene and the yen strengthened further, reaching 13-year-highs against the dollar in December. Notably, a G-7 statement following this weekend's meeting in Rome, attended by Finance Minister Nakagawa, made no mention of the yen, suggesting Japan's window of opportunity had closed. With the global economy worsening, attempts by Japan to go it alone and sell yen are unlikely to be welcomed. In any case, with seemingly little leverage over rival powers, the success of an intervention seems unlikely.

            One idea, mooted recently, is that Japan and the U.S. could do a deal with Japan using surpluses to help the U.S. fund bailout and stimulus costs in return for a combined effort to reduce the yen. Economists, though, aren't convinced. A problem is that the U.S. has little to gain from such a deal. One reason is that U.S. is unlikely to need Japan's help to buy treasuries, particularly as the Federal Reserve chief Ben Bernanke has said it may make purchases and, despite some tough talking by new Treasury Secretary Tim Geithner, China is another option. "As far as I can see a deal on the yen is against the interests of the U.S.," says Macquarie's Jerram. "Effectively it would be a donation of U.S. growth to Japan."
            Consumers Cutting Back

            Critics also contend that policies by Japan's ruling LDP taken several years earlier are now coming back to haunt them. Under former Prime Minister Junichiro Koizumi, Japan scaled back public investment and paid scant attention to dwindling domestic demand, relying on exports to grow the economy. Now, with exports in decline, Japan cannot rely on the the domestic economy act as a buffer.

            What's more, with unemployment rising, long-suffering consumers are understandably reining in spending. (On Feb. 11, Koizumi delivered another blow to Aso, giving him a public dressing down for expressing criticism of Koizumi's plan to privatize Japan's post office.

            For all that, Richard Koo, chief economist at Nomura Research Institute in Tokyo says positives can emerge from the current crisis. First, he says Japan and other Asian economies are learning that they cannot rely on uninterrupted export-based growth and begin to take necessary, but difficult, steps accordingly. "For 60 years, Asia has had a single model of keeping currencies low, making good products, selling them to Americans and getting rich," he says. "We have to reinvent ourselves."
            Infrastructure Projects Could Help

            In the nearer term, Koo notes that while Japan has been slow to enact stimulus plans, the impact of its measures may at least take effect faster than in other countries. One reason: Many infrastructure projects delayed as the Koizumi government cut back on spending can be undertaken relatively easily. "There are a lot of projects at regional government level that were put on hold even though all the environmental studies and usual procedures had been completed," he says. "They are ready to go." For Japan Inc., anything that slows the economic free fall cannot come quickly enough.

            Rowley is a correspondent in BusinessWeek's Tokyo bureau.

            http://www.businessweek.com/globalbi...920_page_2.htm
            “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

            Comment


            • #7
              This can't be good.

              Mr Aso had initially backed his finance minister, who has denied being drunk at a press conference at the G7 gathering in Rome during which he slurred his words and struggled to stay awake and focused.
              Japan’s finance minister resigns

              By Mure Dickie in Tokyo

              Published: February 17 2009 03:59 | Last updated: February 17 2009 12:22

              In a blow to Japan’s beleaguered government, Shoichi Nakagawa, finance minister, on Tuesday resigned amid harsh criticism of his erratic performance at a weekend meeting of the Group of Seven.

              The departure of Mr Nakagawa will deprive Taro Aso, prime minister, of a heavyweight political ally and key cabinet member just as he struggles to respond to a recession of historic proportions and win back the confidence of voters.

              Mr Aso had initially backed his finance minister, who has denied being drunk at a press conference at the G7 gathering in Rome during which he slurred his words and struggled to stay awake and focused.

              Mr Nakagawa, who has blamed his poor showing on taking too much cold medicine, initially tried to delay the effective date of his resignation until the Diet passes stimulus legislation and the state budget, but under growing political pressure was forced to step down immediately.

              “I apologise for causing so much trouble to the public, prime minister and Diet by not managing my health properly,” Mr Nakagawa said.

              Mr Aso on Tuesday won a chance to escape Tokyo’s political turmoil and act as international statesman when Hillary Clinton, visiting US secretary of state, delivered an invitation for him to next week become the first foreign leader to meet US president Barack Obama in the White House.

              Mr Aso said he would appoint Kaoru Yosano, minister for economic and fiscal policy, to replace Mr Nakagawa as finance minister in addition to his current portfolio. Mr Yosano is a veteran policymaker known for championing efforts to repair the deeply indebted government’s fiscal foundations.
              EDITOR’S CHOICE
              Japan to be first Obama guest - Feb-17
              FT Alphaville: Being Japanese means always having to say you’re sorry - Feb-17
              Opinion: Japan’s politicians lose their way at a bad time - Feb-16
              Feeble response exposes ruling party weakness - Feb-17

              Mr Nakagawa’s downfall was the latest setback for Japan’s long-ruling Liberal Democratic party, which must, by September at the latest, contest a general election that polls suggest it is likely to lose to the opposition Democratic Party of Japan.

              “The DPJ must not be able to believe its luck over the resignation of Finance Minister Nakagawa,” said Alison Airey, a political analyst for consultancy Kreab Gavin Anderson.

              “Coming together with news that Japan’s economy has contracted the most of all developed countries, the portrayal of the minister’s behaviour at the G7 conference has touched a particularly raw nerve, and his resignation is undeniably a further blow to Mr Prime Minister Aso,” Ms Airey said.

              Given Mr Aso’s initial defence of his finance minister, Mr Nakagawa’s abrupt resignation risks reinforcing a reputation for inconsistent statements and policy flip flops.

              The resignation came after the DPJ submitted a censure motion to the Diet’s opposition-controlled upper house and raised the possibility it might boycott discussion of the budget and related legislation – a move that would further delay their passage.

              The opposition is seeking to step up pressure on Mr Aso to dissolve parliament, which would open the way for a general election widely expected to end the grip on power of the LDP, which has ruled Japan alone or in coalition for all but 11 months of the past 53 years.

              Copyright The Financial Times Limited 2009
              http://www.ft.com/cms/s/0/b79cb42e-f...nclick_check=1
              “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

              Comment


              • #8
                Originally posted by gunnut View Post
                I believe a part of the reason is due to their powerful rice lobby. They devote a large chunk of the land to plant rice. Japanese rice is very expensive compared to other countries' imports, especially American rice. It's protectionism at its finest.

                This farm land could have been used for other items. Be it development (making houses cheaper) or industrial (make more stuff cheaper).

                Japanese spent more money on rice, therefore less money on other things.

                Expensive living makes children not worth their time. Population ages and decreases. This further dampening demand and innovation.

                Japan is a dying nation.
                Paranoid Island nations

                Open the doors to immigration for people between 18-22, soon they will be crying no more, no more.

                Comment


                • #9
                  Originally posted by kuku View Post
                  Paranoid Island nations

                  Open the doors to immigration for people between 18-22, soon they will be crying no more, no more.
                  I think the culture has to change.

                  Japan is a very chauvinistic nation. The women have very little say in important matters. They should do as they are told.

                  Then women went out and started working. They had money. They could support themselves. So the incentive to endure a husband in exchange for a living is gone.

                  Raising children is expensive so they don't have many. The women are expected to take care of the children, and husband, and the husband's aging parents, and her own parents. Added responsibilities with very little pay off.

                  Under these conditions the women just said "I'm gonna spent my money on myself and live my life." Having a kid will just impede the good times.

                  To illustrate how little Japanese women mean to that society, it took something like 40 years for Japanese government to approve oral contraceptives for sale in Japan. It took 6 months to approve Viagra.
                  "Only Nixon can go to China." -- Old Vulcan proverb.

                  Comment


                  • #10
                    Never heard that about Japan.

                    From what i read, if the answer to a aging population and low birth rates are robots instead of people, then better start making babies, or be ready for a shrinking economy (robots wont earn money, or spend it).

                    To illustrate how little Japanese women mean to that society, it took something like 40 years for Japanese government to approve oral contraceptives for sale in Japan. It took 6 months to approve Viagra.
                    Oral Contraceptive: I have a headache :))

                    Comment


                    • #11
                      Japan’s January exports down 45% year on year

                      TOKYO, Feb 25 - Japan’s exports nearly halved in January from a year earlier, pushing its trade deficit to the biggest on record, in further evidence that the global financial crisis is paralysing the world’s second-largest economy.

                      Exports to Asia slumped at a record pace as manufacturing within Asia, which had thrived on robust global growth until last year, slumped as Western consumers curtail their spending.
                      EDITOR’S CHOICE
                      Tokyo eyes shares to prop up market - Feb-25
                      Editorial: Japan still needs a government - Feb-24
                      Asian stocks gain on financials as yen slips - Feb-25
                      Share plan not seen as a magic cure - Feb-24

                      ”Exports to Asia, particularly to China, are tumbling at about the same pace as shipments to the United States, signalling that even China’s economy may be shrinking,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

                      ”We don’t see any signs of a pickup in the Japanese economy in the near term. The economy will gradually worsen further.”

                      Exports plunged a record 45.7 per cent in January from a year earlier, Ministry of Finance data showed on Wednesday, roughly matching a median market forecast. The month was affected by the Lunar New Year, during which some Asian export markets were closed for several days.

                      Exports to Asia sank 46.7 per cent, the fourth straight month of decline, with shipments to China falling 45.1 per cent.

                      Many Japanese companies ship automobile and consumer electronics parts to assembly lines in Asia, from which final products are shipped to countries across the globe.

                      A collapse in global demand since late last year, which caught most manufacturers off guard, has led to a sharp increase in inventories and forced many leading Japanese companies to slash production at an unprecedented pace.

                      Japanese industrial output is expected to have fallen by 10 per cent in January, a Reuters poll shows, an even deeper fall than that seen in December.

                      The dismal export figures point to further production cuts in coming months as companies wait for inventories of unsold goods to clear.

                      ”The data suggest both domestic and external demand are extremely weak. Given that automakers will cut production, we can expect significant declines in exports for the next few months,” said Satoru Ogasawara, an economist at Credit Suisse in Tokyo.

                      ”The ability to rely on external demand has deteriorated, so unless there’s a pickup in domestic demand, there will be downside risks to the economy.”

                      The deepening recession in Japan, and policy paralysis as an unpopular government struggles ahead of an election this year, are feeding a slide in the yen, which hit a three-month low against the dollar on Tuesday. The yen stood at 96.70 to the dollar on Wednesday.

                      The Nikkei share average gained 1.5 per cent on Wednesday as a report that the Japanese government may buy stocks from the market soothed jittery investors and a weaker yen boosted exporters.

                      Shrinking exports pushed Japan’s trade deficit to a record Y952.6bn, in an export-oriented country where sales of major brands from the automobiles, technology and other manufacturing sectors had been major drivers of growth in the past.

                      The previous record was the Y824.8bn deficit set in January 1980, in the wake of the second Middle East oil crisis. Economists had forecast a deficit of Y1,129.5bn.

                      The trade balance has been in the red for four consecutive months, the longest such sequence in nearly three decades.

                      Imports fell by 31.7 per cent, more than the expected decline of 28.2 per cent, marking a third consecutive month of falls from a year earlier due to falls in oil prices and a rise in the yen.

                      Plunging exports pushed the Japanese economy into its deepest contraction in about 35 years in the final quarter of last year.

                      It shrank 3.3 per cent in the quarter, with the fall in net exports accounting for 3 percentage points of that contraction.

                      The sharp deterioration has prompted big exporters to cut jobs and threatened their small suppliers, raising worries that already fragile consumption could sputter even more.

                      Many economists expect the economy to keep shrinking well into this year and that may yet prove overly optimistic.

                      In the US, a key export market for Japan, Federal Reserve Chairman Ben Bernanke warned on Tuesday that the severe domestic recession could drag into next year.

                      Weakening demand for Japanese goods such as cars and electronic parts has spread to emerging economies including China that had previously offset falling exports to the US and Europe.

                      © Reuters Limited
                      “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                      Comment


                      • #12
                        Originally posted by Ironduke View Post
                        They slid 3.3% last quarter, 12.7% annualized. That's ugly. Japan used to be the wonder economy of the world, where did everything go so badly wrong? Low population growth rate is a given, but what else?

                        http://news.bbc.co.uk/2/hi/business/7891849.stm
                        Japan is strange amongst developed countries & democracies in that its political, social, cultural & economic system is very resistant to change. That would explain its population & demographics crisis. That’s also why Japan has never truly recovered from the 1991 crash, towards a path of sustained growth. The country still relies on an export-driven growth model as opposed to developing a more entrepreneurial & finance-based economy to balance GDP output.

                        Look what happened to Singapore (a similar export-driven economy) and its prosperity and growth when it liberalised certain service industries such as banking.

                        Thanks,
                        Nebula82.
                        Last edited by nebula82; 25 Feb 09,, 16:45.

                        Comment


                        • #13
                          This article is more about US than Japan, not that I agree 100% and some of the new numbers from Japan during the last two months added new lights to the debate, nevertheless it is still a good read.

                          The Japan Fallacy
                          Today's U.S. Financial Crisis Is Not Like Tokyo's "Lost Decade"

                          By Richard Katz

                          From Foreign Affairs , March/April 2009

                          Summary: The financial crisis of 2008 need not usher in a replay of Japan's "lost decade" of the 1990s. The current crisis is the result of correctable policy mistakes rather than deep structural flaws in the economy.

                          Richard Katz is Editor in Chief of The Oriental Economist Alert and the author of Japanese Phoenix: The Long Road to Economic Revival.

                          audio iconListen to this essay on CFR.org

                          In periods of crisis, pundits and policymakers tend to scramble for historical analogies. This time, many have seized on Japan's notorious "lost decade," the decade of stagnation that followed a mammoth property bubble in the late 1980s. But this comparison is wrong. In Japan, the primary problem was pervasive dysfunction in the economy, which caused a banking crisis. In the United States, pervasive dysfunction in the financial sector has caused a deep recession in the economy as a whole. This financial dysfunction is not the result of structural flaws, as in Japan, but of grave policy mistakes. It is now being compounded by widespread investor panic.

                          The consequences of the 2008 U.S. financial crisis will be different from Japan's slump in the 1990s for three reasons: the cause of the current crisis is fundamentally different, its scope is far smaller, and the response of policymakers has been quicker and more effective.

                          Japan's malaise was woven into the very fabric of its political economy. The country has a thin social safety net, and so in order to protect jobs, weak domestic firms and industries were sheltered from competition by a host of regulations and collusion among companies. Ultimately, that system limited productivity and potential growth. The problem was compounded by built-in economic anorexia. Personal consumption lagged, not because people refused to spend but because the same structural flaws caused real household income to keep falling as a share of real GDP. To make up for the shortfall in demand, the government used low interest rates as a steroid to pump up business investment. The result was a mountain of money-losing capital stock and bad debt.

                          Japan's crisis pervaded virtually its entire corporate world. In sector after sector, debt levels and excess capacity ballooned and profitability remained low. White-elephant projects, from office buildings to auto plants, were built on borrowed money under the assumption that if times got tough, the government and banks would bail out the debtors. But the banks were too poorly capitalized to write off bad loans. And for every bad loan, there was a bad borrower whose products were not worth the cost to make them. The cumulative total of bank losses on bad debt between 1993 and 2005 added up to nearly 20 percent of GDP.

                          Policy mistakes -- from Japan's mismanaged fiscal and monetary policy to the government's failure to address the loan crisis -- made a bad situation even worse. But even if policymakers had done everything right, Japan's economy still would have stagnated until Tokyo addressed its more fundamental flaws.

                          DEREGULATION NATION

                          The United States' subprime mortgage fiasco of 2007-8, in contrast, was primarily the result of discrete, correctable mistakes brought on by ideological excess and the power of financial-industry lobbyists rather than intractable structural problems.

                          The first mistake was the U.S. government's refusal to regulate subprime mortgages. Traditional banking regulations forbid banks from lending to people with no down payment or proof that they can repay a loan. However, no such rule applied to nonbank lenders, even after they became the country's biggest mortgage originators. That left new mortgage institutions with little incentive to ensure that their loans could be repaid; no sooner had they issued these so-called liar loans than they resold them to investment banks for a profit. The investment banks then sliced and diced the loans into securities embossed with AAA ratings despite the dubious creditworthiness of the original borrowers. A single statistic makes clear how damaging this lack of regulation was: by the third quarter of 2008, 22 percent of subprime, adjustable-rate mortgages were in foreclosure; by contrast, the foreclosure rate for prime, fixed-rate mortgages -- 60 percent of all mortgages -- was still less than one percent.

                          There were plenty of warnings. In 1994, a bipartisan coalition in Congress passed the Home Ownership and Equity Protection Act, which enabled the Federal Reserve to force all mortgage lenders to follow traditional banking standards. But Federal Reserve Chair Alan Greenspan refused to use these powers, claiming that the financial markets were self-correcting. When Democrats and Republicans in the next Congress tried to require that the Fed enforce these rules, House Majority Leader Tom DeLay (R-Tex.) quashed the effort.

                          The second policy blunder was the U.S. government's failure to regulate the compensation of chief executive officers (CEOs) -- a system that in its current form gives executives incentives to take outrageous risks with other people's money. When CEOs are paid primarily in stock options, as is the case today at many firms, they suffer little punishment for failure. If CEOs gamble big with the company's money and succeed, they can gain hundreds of millions of dollars in bonuses; if their gambling fails, they do not suffer losses, just a smaller reward. Even CEOs who have caused their firms to collapse, such as Merrill Lynch's Stan O'Neal, have still walked away with enormous severance packages. This system is a critical factor in the behavior that led to today's crisis. Studies show that extraordinary losses are much more common at firms where the majority of CEO compensation comes from stock options, rather than cash or outright stock.

                          The third error was the virtual nonregulation of the derivatives market. Derivatives should serve as a kind of insurance to lessen risk. Corn futures, for example, stabilize farmers' incomes, inducing them to plant more, which gives consumers more food at cheaper prices. Today's financial derivatives often turn the insurance principle on its head, causing shocks to be amplified and transforming derivatives into what the investor Warren Buffett has called "financial weapons of mass destruction." If an investor buys a share of General Electric from Merrill Lynch, that share retains its value even if Merrill goes bankrupt. But unlike corn futures or stocks, most financial derivatives are traded not on exchanges but in bilateral deals. If an investor's trading partner (counterparty) fails, the investor takes the loss. The collapse of the investment bank Lehman Brothers caused the insurance company AIG to lose big in so-called credit default swaps, undermining trust in all counterparties and causing a run on the entire derivatives and securitization markets. Rather than frightened depositors banging on bank doors, the result was investors furiously clicking away at their keyboards as their money disappeared. In the end, the impact was the same: perfectly solid companies suddenly found themselves unable to issue commercial paper, and creditworthy homeowners found it hard to get car or student loans. It took an intervention by the Federal Reserve to forestall a more serious meltdown.

                          This run on the shadow banking system is the real cause of the severe post-September credit crunch that transformed a mild recession into something far worse. Banks have actually increased their extension of credit by six percent since September, but they are having a hard time securitizing those loans in the capital markets. That means that they can no longer use the proceeds to make further loans, which would allow them to use the initial dollar over and over again.

                          If powerful financial lobbyists waving the banner of faith in markets had not thwarted commonsense regulation, much of this would never have occurred. Democratic and Republican policymakers alike, from Treasury Secretaries Robert Rubin and Lawrence Summers to Federal Reserve Chair Greenspan, blocked attempts at reform in 1998. Then, in 2000, Senator Phil Gramm (R-Tex.) went so far as to virtually outlaw the monitoring and regulation of many types of derivatives by initiating the Commodity Futures Modernization Act. Just as deposit insurance now prevents massive runs on banks, the regulation of derivatives could have made this crisis less severe.

                          A TALE OF TWO BUBBLES

                          The scope of the Japanese crisis and the scope of the U.S. crisis are also fundamentally different. From 1981 to 1991, commercial land prices in Japan's six biggest cities rose by 500 percent. The subsequent bust brought prices down to a level well below that of 1981; as of 2007, they were still 83 percent below the 1991 peak. In the United States, the real estate bubble was not as inflated, and the bust has been less severe. From 1996 through the 2006 peak, housing prices in the 20 biggest U.S. cities rose by 200 percent. Most forecasters think prices will drop by 30-40 percent from the peak levels before bottoming out in 2009 or 2010. No one is suggesting that prices will fall below the level of 1996.

                          Most of the United States' nonfinancial corporations are still healthy. Whereas the debt of Japanese corporations was several times their net worth, in the United States, corporate debt amounts to only half of companies' net worth, the same level that has prevailed for decades. The ratio of nonperforming loans among nonfinancial companies is only 1.6 percent, and productivity growth remains solid.

                          In October 2008, the International Monetary Fund's Global Financial Stability Report predicted that the losses on all U.S.-originated unsecuritized loans (including home mortgages) would amount to $425 billion, about three percent of U.S. GDP. This estimate will likely rise, but even then it would not come close to the 20 percent ratio that Japan experienced.

                          The biggest financial losses are coming not in loans taken out by household or business borrowers but in the shadow banking system. Because of the leverage inherent in financial derivatives -- which are designed so that a one percent hike in real estate prices can create a much larger gain in asset-backed securities -- a small loss in the value of the underlying assets can be multiplied several times over. Far more significant is the psychological factor: by mid-December 2008, pure panic had pushed the value of AAA-rated commercial-mortgage-backed securities (CMBS) down to 68 percent of their face value, despite a commercial-mortgage delinquency rate of only one percent.

                          That 32 percent loss has reverberated throughout the financial system due to mark-to-market accounting rules, which require securities to be valued at their current market price, even in markets where there is little trading and prices fluctuate wildly. As a result of these rules, all investors holding CMBS have had to write down their holdings by 32 percent, even if the underlying mortgages are being paid on time. That, in turn, has led prices to decline even more and investors to write off more capital, further tightening the credit crunch.

                          The International Monetary Fund predicts that this vicious cycle will cause $1 trillion in mark-to-market losses, as much as seven percent of U.S. GDP. If this is correct, most financial losses suffered since the onset of the crisis will have come not from genuine defaults in the real economy but from problems generated within the shadow banking system. Applying normally beneficial mark-to-market rules in today's abnormal markets without any adjustment is doing more harm than good. By the time the economy recovers and those marked-down securities are marked back up, the credit crunch will have led to a host of corporate bankruptcies, millions of layoffs, and countless families losing their homes.

                          A PROGRAM OF ACTION

                          The Japanese and U.S. crises differ in many ways, but the starkest contrast is in the response of policymakers. Denial, dithering, and delay were the hallmarks in Tokyo. It took the Bank of Japan nearly nine years to bring the overnight interest rate from its 1991 peak of eight percent down to zero. The U.S. Federal Reserve did that within 16 months of declaring a financial emergency, which it did in August 2007. It has also applied all sorts of unconventional measures to keep credit from drying up.

                          It took Tokyo eight years to use public money to recapitalize the banks; Washington began to do so in less than a year. Worse yet, Tokyo used government money to help the banks keep lending to insolvent borrowers; U.S. banks have been rapidly writing off their bad debt. Although Tokyo did eventually apply many fiscal stimulus measures, it did so too late and too erratically to have a sufficient impact. The U.S. government, by contrast, has already applied fiscal stimulus, and the Obama administration is proposing a multiyear program totaling as much as five to six percent of U.S. GDP. When it comes to crisis management, it is far better to do too much than too little.

                          Policymakers can draw many lessons from this comparison. First, the current U.S. crisis -- like the Asian financial crisis of 1997-98 -- has proved that even an economy with sound fundamentals can be thrashed when financial markets go haywire. However, the Asian crisis provides a more promising message: once financial markets are calmed and policy mistakes are reversed, economies recover.

                          Second, whereas Japan needed a thorough overhaul of its political and economic institutions and practices, a process that continues today, the United States simply needs aggressive reform of its financial architecture and CEO compensation system. President Barack Obama clearly understands the need for better regulation, and there is reason to hope that his economic advisers, many of whom are alumni of the Clinton administration, have learned from their mistakes. In October, former Treasury Secretary Summers, now director of the National Economic Council, wrote in the Financial Times, "The pendulum will swing -- and should swing -- towards an enhanced role for government in saving the market system from its excesses and inadequacies."

                          Third, fiscal policy works, but only in connection with other measures. Many commentators believe that Japan's lost decade proves the uselessness of fiscal stimulus. They are wrong. When Tokyo stepped on the fiscal gas, the Japanese economy did better. When it took its foot off the pedal or, worse yet, applied the brakes -- such as when it raised taxes in 1997 -- the economy faltered. Equally important, it is hard for fiscal and monetary stimuli to be effective when the financial system is broken.

                          Finally, markets only work when undergirded by proper regulatory institutions that enforce genuine checks and balances on corporate executives, corporate boards, financiers, accountants, rating agencies, and regulators. Better rules make it safe to have freer markets.

                          There is, of course, one way in which the United States' crisis is much worse than Japan's: its global ripple effects. Getting through today's recession will be neither quick nor easy. But there is absolutely no need for fatalism or talk of an upcoming "lost decade" in the United States. The first step is to recognize, as Obama has repeatedly stressed, that this crisis is not a once-in-a-century unforeseeable disaster. Bad policies created this mess. Better policies can fix it.
                          “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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                          • #14
                            Japan is strange amongst developed countries & democracies in that its political, social, cultural & economic system is very resistant to change. That would explain its population & demographics crisis. That’s also why Japan has never truly recovered from the 1991 crash, towards a path of sustained growth. The country still relies on an export-driven growth model as opposed to developing a more entrepreneurial & finance-based economy to balance GDP output.
                            Quite strange, considering that they radically transformed their society when Tang China won a proxy war against their allies in the Korean peninsula, and when Commodore Perry came-a-knocking the Japanese had the best performance of any non-Western country: they managed to carve out their own colonial empire and defeat the Czarist Russian navy.

                            Guess they got fat, huh.

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                            • #15
                              I just have time reading a fine print this morning when I sold some of my stocks at a lose, of course. It was making me money before.

                              "past performance is no guarantee of future results. "
                              “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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