With the tragic disasters in Japan, there has been a lot more talk of the country in general. Japan has an interesting economic story and it is important to review.
After World War II, Japan was devastated. There were two cities that had nuclear bombs dropped on them and the country as a whole experienced a great loss in life and property. But along with Germany, a miracle seemed to take place. That miracle was the free market. Japan and Germany both adopted relatively free market policies that laid the path to huge growth.
Japan became one of the richest countries in the world. By the 1980’s, there was paranoia in the United States and other western countries that Japan was taking over the world. Japanese companies were buying assets in the U.S. and were becoming big manufacturers. People were worried that the Japanese were undercutting the competition by selling cheap products. My response was to point out that we shouldn’t complain if they want to sell us inexpensive products. Would we complain if they were giving them away for free?
Then the 1990’s came. The Japanese stock market hit a high of over 38,000 in 1989. In March 2009, it hit a low just above the 7,000 mark. Perhaps the lost decade should be referred to as the lost 2 decades.
So if you invested in Japanese stocks in late 1989, you would still be down by well over 50%. So much for the theory of buy and hold. But Japan really is a mixed picture and it is important to look at both sides.
The Japanese people in general are hard working and highly educated. Unfortunately, the government is mercantilist. The government in Japan, while not the worst, is not exactly an example of free enterprise. This has stifled growth. There is much more bureaucracy and spending now than compared to 50 or 60 years ago.
Although Japan has seemingly struggled in the last 20 years, it is important to remember that it is the second richest country in the world (per capita) out of the major countries. The U.S. is still the richest. For this, I am not including small countries like Singapore, Hong Kong, and Dubai, which are examples of the most economically free places on earth.
The Japanese government has an enormous debt. The debt to GDP ratio is around 200%. This is by far the highest of any industrialized nation. But at the same time, the Japanese central bank is not creating money out of thin air like crazy as other places are. This is why the yen is still an attractive currency. The only reasoning I can think of behind this is that there are a lot of suckers in Japan buying government debt. Maybe they can’t be considered suckers yet because interest rates have remained low, but at some point the holders of government debt will be suckers.
The Japanese government and Japanese central bank will be faced with a decision similar to that in the U.S. Either the government will have to drastically cut back or the central bank will have to inflate. If neither of these happen, then the Japanese government will default on its debt outright. It cannot be sustained.
If there is one lesson to be learned from Japan, it is that the government can kick the can down the road for a long time if it can find enough suckers. It really is amazing that the debt to GDP has gone to 200% without seeing rates skyrocket.
Japan will face the inevitable just like the west. The government’s spending is not sustainable. The earthquakes and tsunamis are a further setback for the Japanese people. However, it is still a rich country with hard working people. If the people there ever get the government to pursue free market policies like it did after World War II, the economy there would take off.