Twenty years ago, on 29 December 1989, Japan’s Nikkei index hit its all-time peak of 38,957. From there, it spiralled into a collapse from which it still shows very little sign of recovering. It’s not an anniversary anyone would want to celebrate.
But it’s significant for far more people than just those few unfortunates who bought into the Tokyo market at the end of the 1980s. Economic policy-making is dominated by the fear of repeating Japan’s two-decade stagnation. The policies that Japan forged to combat it – printing money and huge government deficits – have been followed by America, Britain, and most of Europe. Yet it’s becoming clear that we learned all the wrong lessons from the bursting of the Japanese bubble. Printing money and endless rounds of extra government spending haven’t worked for Japan. And the same policies aren’t likely to work out much better for the rest of us.
During the 1970s and 1980s, the Japanese economy and stockmarket was one of the strongest in the world. From 11,000 in 1985, the Nikkei index nearly quadrupled over the next four years. Property prices went even crazier. At one point, the value of all the land in Japan was worth four times as much as the whole of America. (Property prices, since you ask, are still 60% below their peak.)
Like all bubbles, the Japanese boom took a kernel of truth and stretched it to absurdity. The country was on a roll. Its auto and electronics industries were crushing the bloated dinosaurs of Europe and America. It was emerging as the richest, most technologically advanced society in the world. It was no surprise that everyone wanted a piece of the action. Prices overshot vastly, as prices in a free market usually do. A collapse of the bubble was inevitable at some point.
The government and the Bank of Japan were initially fairly relaxed. But once it became clear that growth was taking a hit, and the banking system was badly injured, two policies were developed in response. Interest rates were slashed, and when that didn’t work, it was followed up with a novel policy called ‘quantitative easing’. And the government ran up huge deficits to stimulate demand.
The world’s central bankers have looked at Japan and drawn a simple lesson. Monetary and fiscal policy “should have become even more aggressive in an effort to prevent a deflationary slump”, as a paper from the US Federal Reserve on the fall-out from the collapse put it. Policy-makers believe Japan came up with the right medicine, but not quickly enough. And now we’re doing what they did more than a decade ago, only more aggressively.
There’s just one snag, however. In Japan, it didn’t work. Two decades on from the crash, the Nikkei still hasn’t recovered. At the depths of the crisis last year, the index went down to almost 7,000, and is still hovering around 10,000. The economy splutters on life support. The banking system refuses to spark back into life. The deficits remain huge. The truth is, we learned the wrong lesson from Japan.
There are two important points. First, the cure has been worse than the disease. Japan has landed itself with a potentially huge debt crisis. The budget deficit stands at 10.5% of GDP, among the highest in the world (although not as high as Britain’s). Government debt will hit 246% of GDP by 2014 against 108% for the US, according to the International Monetary Fund. The possibility of default is already being discussed.
Next, the Japanese were being unrealistic in expecting to get back to the growth levels of the 1970s and 1980s. For much of the post-war period, Japan was a young, smart country, playing catch-up with the West. By 1989, its companies couldn’t play catch-up with anyone. They were already world leaders, whether on design, technology, or manufacturing savvy. Growth was always going to be a lot harder.
On top of that, Japan was rapidly ageing. More than 20% of the Japanese are already over 65. Since 2006, the country’s population has been steadily shrinking. Over the next decade it will fall by 3.2% from its current 127 million. In light of that, Japanese growth wasn’t that bad. Between 1991 and 2000 it grew at an average rate of 1.5% a year, about the same as France and Italy. Between 2004 and 2008 it grew at more than 2% a year. Japanese firms continued to be among the most formidable in the world, and its designers and entrepreneurs as brilliant as ever. Take a look at the number of Toyotas and Nissans on the roads, the Nintendos in every satchel, and the Uniqlos in every shopping mall. You can plausibly argue that Japan’s economy has been doing fine for the last 20 years.
Japan should have accepted that the excesses of the 1980s bubble had to be purged. And that an ageing, advanced society was not going to be capable of rapid growth. At best, the policies of printing money, and massive deficits, have been irrelevant. At worst, they are storing up problems for the future. All that government spending did little to revive the economy. But it may create an even worse crisis some time in the coming decade. The real tragedy is that we seem intent on repeating their mistakes – when we could have been learning from them.