At a time when most of us are cutting back on spending, one group is splashing the cash freely. Japanese companies are finally opening their wallets and snapping up cheap assets across the world. They’ve taken their time. They haven’t spent this much since the 1980s boom. Is it possible that we could be waiting a similar length of time before the boom days return for the West?
Most pundits still don’t think we could experience a Japan-style ‘Lost Decade’ in the UK or US. Trouble is, their arguments are wrong. Take one popular myth, that Japan’s property bubble was bigger than any other. In reality, as The Economist points out this week, Japanese house prices rose by just 51% between 1985 and 1991. That compares with a 90% jump in the US from 2000 to 2006, and a 118% surge in Britain between 2001 and 2007.
Then there’s the idea that Japan’s central bank somehow made mistakes in handling the bust. In fact, the Bank of Japan cut interest rates just as quickly, and if anything a little further than the Federal Reserve did, as soon as property prices started to collapse. If the Japanese authorities made mistakes, they’re the same ones that the Fed is now making.
Then there are those “cultural differences”. Allegedly something in the Japanese mindset condemned them to all these years of grinding deflation. But they were similar enough to us to use cheap money to blow up a huge property bubble. So just maybe, under the right conditions, we in the West could also suffer a deflationary bust. And the big worry is that we may have those conditions right now.
As Nomura economist Richard Koo has pointed out, the root of Japan’s problems was simple: companies and consumers had spent too much borrowed money on property and stocks. When prices collapsed, they were left with debts far higher than the assets backing them. So they did what any sensible person would do – they started paying down debt rather than spending. It didn’t matter how low interest rates went – no one wanted to spend, so no one borrowed.
The worrying – if obvious – lesson from Japan is that the country’s huge bust was mainly down to the size of the huge boom that preceded it.
And here’s the really scary thing. When Japan went into its downturn, households were saving 15% of their income. In the US, the savings rate is just 2%, and that’s been artificially lifted by recent tax rebates. So maybe we won’t just see a repeat of the Lost Decade. Maybe this time round, it’ll be worse.