For the question concerning Japan, I relied on Bai Gao's Japan's Economic Dilemma: The Institutional Origins of Prosperity and Stagnation, as well as a shorter publication from the Woodrow Wilson Center and Sasakawa Peace Foundation, titled, "Looking Forward: U.S.-Japan Economic Partnership in the Post-Lehman World." American journalist David Wessel and former Vice Minister of Finance Eisuke Sakakibara were the two contributors to this piece.
I'll start with Gao's book. According to Gao, the Japanese economic collapse was essentially caused by a glut of money, a lack of regulation, new means of profit-making, the decline of Japanese banks' influence, and bullish sentiments in Japanese companies. From what I was able to glean, here's essentially what happened:
1. In 1985, in the Plaza Accords, the Japanese committed to a roughly 40% increase in the value of the Yen, making the currency much stronger. Although self-defeating, this decision was made in response to U.S. pressure, as the U.S. had finally begun to lose tolerance for Japanese manipulation of the Yen, which boosted Japanese exports at the expense of American imports.
Predictably, the rise in the Yen hurt Japanese companies, which had been export-focused for the entire post-war era. In an attempt to avert recession, the Bank of Japan (BoJ) lowered interest rates and traded dollars for Yen (before the 40% increase took place), drastically expanding the money supply. Companies engaged in currency conversion as well, so despite the downturn caused by the currency revaluation, they were still sitting on big piles of cash and savings. In effect, there was a ton of cash just waiting to be invested and drive up prices.
2. Even with the currency reevaluation, the Japanese were still running trade surpluses with the U.S. and Europe into 1986 and 1987. In response to a government report on the topic (the "Maekawa Report"), which strongly recommended a boost in domestic consumption to solve the problem, the Nakasone administration issued a large fiscal stimulus package, which was pretty big (about 1.8% of GDP, or 6 trillion yen). As these funds were funneled into local government projects, they boosted land prices, beginning the run-up in real estate prices that occurred during this period.
3. The brunt of the problem had yet to come. With the increase in the value of the Yen, large Japanese companies abandoned their traditional emphasis on exports and quality improvement in exchange for short-term profit. This was done through quick investments in the stock market, on a huge scale. Between 1983 and 1989, Japanese stock prices increased three-fold. Companies also invested in other assets - most notably, real estate. Lots of it. It was during this time that Japanese companies became famous for investing in resorts, foreign property (i.e, the Rockefeller Center or Hawaiian cottages), and golf courses, sparking stock-market speculation and a land boom. This is just an aside, but I should note that at the height of this land boom, the grounds of the Japanese Imperial Palace were valued higher than all of the land of California.
To be sure, Japanese companies also invested heavily in capital and export capacity during this period. But they didn't innovate or improve efficiency - they merely expanded the capacity to produce existing exports. The author uses the term 'bubble technology' to describe the sorts of superficial, ineffectual improvements that were made to products during this period instead, in place of genuine innovation.
4. Deregulation in the 1980's only exacerbated short-term speculation. A new rule unveiled by the government increased the profitability of stock-market activity. Originally, before the rule, if a company bought shares of another corporation in two waves, and the price of the shares had gone up by the time of the second wave of purchases, for accounting purposes, taxes would be paid on an average that included the adjusted price. So, beforehand, taxes were paid on the old price + the new price, divided by 2. After the new rule, however, taxes only needed to be paid on the price of the share in the first wave of buying. As such, it made sense to not only buy more stocks, but to bid up the price of the stock rapidly in order to offset the cost of taxes, even in their reduced form.
5. Meanwhile, banks lost influence, leading to a whole other mess of other problems. Traditionally, in the 60's and 70's, Japanese corporations received most of their funding through large bank loans. These loans gave banks enormous regulatory control over the behavior of companies, and kept aggressive CEO's in line. As soon as it became more profitable to seek self-capital through the stock market, however, this trend ended. Beginning in the early 1980's, huge corporations (Mitsubishi, Sumitomo, etc. etc.) paid off their loans en masse, leaving banks in a lurch. In turn, they had to compete for customers from smaller, middle-sized firms with riskier prospects. Many loans were made to default-prone customers, and led to the unique breed of unprofitable corporations later kept alive by the government in the 1990's known as "zombie corporations."
New bank loans also helped drive the land boom. A unique aspect of Japanese banks is that they tend to use land as collateral when granting a loan. Corporate strategy, product spread, and other aspects of a company are less important than the real estate it owns. As such, by 1987, land served as the principal collateral for more than 20% of bank loans for these small and middle-sized companies, further egging on the massive increase in land prices.
6. Bullish sentiment served as the bedrock of the whole phenomenon. As in all bubble economies, consumers thought Japan had reached a permanent peak, and that low interest rates would go on forever. But this was not so. The BoJ soon began to raise interest rates to reign in the economy, and returns on stocks began to fall by 1990-1991. On the whole, the Japanese economy began to collapse gradually between 1990 and 1992, and would remain sluggish until 1995, when it resumed course briefly but then fell back into recession. Japan's economic outlook picked up somewhat in the 2000's, and seemed to be getting much better in 2007, but then the global economic crisis of 2008 reversed many gains.
Why did the Japanese economy underperform throughout the 1990's, during a time that is famously called Japan's "lost decade?" I myself still need to research this question more, but let's turn to the next book to get more insight on this...
The Woodrow Wilson Center publication, by way of comparing Japan's economic collapse with that of the U.S. 2008 recession, helped to address this sort of question. The publication labelled this sort of economic collapse - as experienced by Japan, and now, by the U.S. - as a "balance-sheet recession." In such a situation, companies and banks are burdened by toxic investments that are hard to clean up. Even with interest rates near 0%, meaning that a bank can borrow money for free and throw it into profitable investments, these bad loans still clog up the system and take time to be washed out. It's a long, grueling process. In Japan's case, according to one of the experts in the publication, too little action was taken too sporadically. 7 major stimulus projects were pushed between 1990-1992, but this focus was lost thereafter, and after 1995, when the economy began to improve somewhat, helpful stimulus measures were abandoned. In short, there was no massive stimulus project to boost the economy in a meaningful way, pushing the country past its glut of toxic investments.
Moreover, going back to a point made in Bai Gao's book, the structure of the Japanese economy during this period was all wrong. Japanese companies had over-invested in export capacity in the late 80's, and it took a long time for Japan to reach a point where it could make use of it all. Moreover, their technology was outdated. Japan missed the internet revolution, and as American companies sped ahead in investments in computers and the like, Japanese companies did not catch up until much later.
Anyway, let's talk about China now. For this subject, I turned to Chi Lo's, China after the Subprime Crisis: Opportunities in the New Economic Landscape. Lo's book was highly technical, and at times, I struggled to get through it. Basically, though, Lo also began his study of the Chinese economy by way of comparison with the U.S. economy after the subprime crisis. Lo, agreeing that the U.S. was in the midst of a balance-sheet recession, felt that it is necessary to remove needless regulation and allow the economy to wash out bad loans, without huge government stimulus packages. As an alternative, he recommended more emphasis on foreclosures, as a way of 'clearing the board' and freeing up funds for new investment.
When it came to China, Lo's points, if I were to boil them down into a basic form, are interesting. In Lo's view, China's economy is inherently bubble-prone because of the large amount of cash that is sloshing around the system. He also feels that its export-oriented economic structure is going to start experiencing problems. Lo argues that China must soon make efforts to boost domestic consumption, as it can not always count on exporting to European and North American (*cough* the U.S. *cough*) countries that will increasingly be unable to afford Chinese products on the same scale. In this effort, one principal initiative that the Chinese government must spearhead is the creation of a social safety net. The Chinese government offers even fewer services to its citizens than Mexico, which puts a huge financial burden on its citizens. They must pay for things like health-care almost completely out of pocket. Hence, in a big way, the 40% savings rate you see in China right now. As of 2009, the amount of government spending on health care is indeed rising (from about 2% to 4% of GDP), but it has yet to make a large dent.
So, in sum, an interesting round of reading. More to come later!
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