Japan Economic Series

  -- Historical Perspective Post WWII Prosperity

Welcome to the debut of my new series on the Japanese economy - a topic in Japan second on the "weather", but discussed with less enthusiasm and definitely less clarity.  

Let me first say that despite the gloom and doom held by most regarding that state of the Japanese economy, I am a "big fan" of the Japanese economy.  Structurally I think the country is very stable and resilient.  The country will probably never create the success of the late 20th century, but neither will America or the European Union.  That said, I truly believe that Japan is well positioned to take care of the general welfare of it's citizens, something that I think western country are going to stuggle with for at least a decade.  Anyway, there are numerous deeply engrained myths about the Japanese economy, held by those domically and well as in America.  Over time I hope to dispel them and bring clarity and insight to this important issue. 

First let's start with per person GDP adjusted for inflation, specifically nominal GDP per capital adjusted to 2008 real yea by Japan CPI.  See technical not below.  The graph of the data is from 1952 tell a remarkable story.  A few points worth noting:

Discussion

• The effects of WWII on Japan was devastating on both people and the economy.  In 1952 economic statistics became available again but realize that we ar starting from a very low base. . 
• From 1952 to 1964 the year of the Tokyo Olympics, Real economic activity person almost tripled (178% growth ). Conceptually, best to think of this as a post war normalization period.
• 1964 to 1973.    From 1964 to the year of the Arab Oil Embargo, real economic activity person almost double (96% growth ).  During these times, there were tremendous undeveloped opportunities to exploit as as seen here graphically.  
• 1973 to 1981  Rapid increases in oil prices following the  Arab Oil Embargo resulted in consumer prices doubling.  That said, nominal gdp tracked this general rise.  Overall, Real economic activity per person grew a total of 8% during these difficult times, which also line with real growth in average wages.
• 1981 to 1989.  Pre-Bubble Growth.  A 38% growth in economic activity per person.  1981 was the year oil prices began to "break".  Also the year interest rates in the USA began to decline from record high levels.  over all the 80s was a period where people became much better off. 
• 1990 to 2008.    1990 marked the beginning of a 13+ year real estate and stock market decline.  The economy charged onward another 10% (in nominal terms) through by this was accompanied by inflation so the economic growth was not real.  There were numerous high profile banking disaster, bailout, forced mergers in the early 2000s.  Stock market bottomed in March 2003 - the same week I first came to Japan.  As the financial markets stabilized the general economic mode inprove.  That said, sespite economic calamity of the 90s and early 2000s, the real economic activity per person from 1990 to 2008 actual was 4% larger and real per capita wages up 8% total over a 18 year period.  

Technical notes:  Data set started with nominal gdp per capita and converted it to "inflation adjusted 2008 yen".  Hence, them number a "real gdp" number.  However, it is not the GDP using the GDP deflator, a classic economist way of looking at real GDP.  Normally, the results are very similar if not the same.  However, for some reason, the GDP deflator numbers paint a slight brighter picture of the post 1990 period.  Since I am extremely uncomfortable with this assessment, I deem it most appropriate to convert my "inflation adjusted yen" approach as it really is the yen the people spend every day and not some number arising from by economic theory.   

Watching the movie "Bubble Fiction"  is great introduction to the Japanese economy.  It is a reasonably well know Japanese Comedy where a Japanese youth follows her scientist "single mom" back in time (with a time machine) to try to prevent the bursting of the real estate bubble.  She ends up "falling for a man" who would eventually be her father.  I consider the viewing go this movie as a prerequisite in understanding Japanese culture and mainstream thinking regarding the economy. 

Anyway, there are many misconceptions about the 1990 bubble.

• Yes, a dramatic decrease in real estate that persist to this day
• Yes, a dramatic decrease in stock prices that continued for 13 years.
• Yes, a banking system in distress even through 2003,
• And, yes, the many anecdotal stories of both the excesses and the horrible hardships post bubble.

However, a long term view of headline GDP data resulting is a different perception. 

1. Show total size and per person size
2. GDP data uses the GDP deflator not the CPI.

Chart shows real per capita GDP growth - which actually grew  20.4% from 1990 to 2008,  The chart is to the right and the Real per Capital GDP growth by decade is as follows:

• 1950s     68.0 % (from 1952)
• 1960s    109.2 %
• 1970s    39.6 %
• 1980s    41.8 %
• 1990s     9.4  %
• 2000s:  10.0  % ( through 2008 )

We have talked about it earlier, Japan "posted "  impressive GDP growth numbers playing catchup following the end of WWII.  Then the 70s and 80s was impressive as Japanese electronic and automotive industries exploded on the world scene. 

It is true that the level of economic activity has slowed.  However, it is incorrect to say that Japan is stuck in / with a no growth economy, which is often what people assume when they listen too much to the media.

While Japan's 20.4% increase in real per capita GDP from 1990 to 2008, is not as much as America's 36.1% growth or the growth of the UK or the European Union, Japan's growth is impressive in the following way:

• Japan's economic expansion was balanced in that domestic consumption hardly ever exceeded foreign export.  Japan generate significant capital account surpluses during this period.  Not unlike China recently but definitely different the the USA and the E.U.  
• Japan growth (unlike America's) was fueled by a unprecedented credit expansion and an, the level of overall indebtedness in the banking system.
• Japan's growth not occur as a result of an over-fascination with a) consumption b) home building or c) retail.  The composition of economic activity did not necessarily dramatically increase.
• Japan still had low inflation and low unemployment. 

Interim Conclusion.

OK  I think I have said enough detail.  Let me finish this brief introduction by saying the following:

1. A stream that is "good for the fish" isn't necessarily good for fishing.  Japan is a place where I jokingly say "even McDonalds and Walmart loses money" (true story for most of the early 2000s).  Return of Equity for Japanese companies is at least 1/2 that of US and Western Europe.  Host of reasons why, but key is that Japan is in a low/no inflationary environment which makes the comparison unfair. 
2. Opportunities for young people remain challenged.  Furthermore, young people seem much less interests in working the demanding # of hours required to be a Japanese "salary man"
3. Banking.  Balance sheets are now much cleaner, but the banking dominated by the Big 3.  While c3 concentrations are not what anti-trust types would call anticompetitive, these banks are far beyond the can't fail level.  Problematic for policy makers. 
4. Current Account Balances.  The envy of all the world, except China.  (Story for another time)
5. Consumerism & "Consumptionism"  Japanese people are fascinated with western brands.  However, to Japan's credit, policy makers and bankers have not used consumerism, or what I call consumptionism, to "prop up the economy".

TO BE CONTINUED.

See:  Why Japanese People Feel Less Prosperous

Lessons

• Stocks & Real Estate - wildly overvalued in the late 80s, makes a lot f sense it could not be sustained.  The lesson here is for policy makers..... (omitted ... discussed elsewhere)
• There are also lessons for investors - both portfolio and direct investment .... (omitted ... discussed elsewhere)