Il decennio perduto del Giappone: avvertimenti per l’America?

Il decennio perduto del Giappone: avvertimenti per l’America?

From economic powerhouse to an economic depression called the lost decades. What happened to Japan? It’s the 1980s and Japan is an economic juggernaut. Skyscrapers are rising, the NIC stock index is soaring, and Tokyo land prices are worth more than entire countries. Sound familiar? It’s a story of dizzing heights and crushing lows, not unlike some of the booms and busts we’ve seen in the US. Some are even asking if the US is due for a similar deflationary bust. In this video, we’re diving into Japan’s wild economic ride from 1980 to 2000, the asset bubble, what caused it, and what happened when it popped. We’ll also compare it to the US, exploring what these two global giants have in common and where their past diverged. So, over here on the left, we have the NIC. This is uh the Japanese stock index. Here on the right, we have the NASDAQ. This is a stock index of tech companies here in America. I will show the S&P 500, which people might be more familiar with. similarly parabolic. Everything is getting so expensive whether it’s housing or the stock market that there is a general sentiment especially amongst normal people that everything is so stretched that it must pop the bubble must pop that everything bubble must pop we must have deflation recession depression uh there there are growing kind of uh sentiment uh of the of of a coming depression of a coming recession well we can look at Japan uh and I did uh do a video on the lost decades. Uh that’ll focus more on that period of time. But for this video, I want to focus more on the asset bubble, what caused it, why it happened, what caused it to pop. And again, similarities between Japan and America. Uh so again, we can see that uh clearly there was a stock market bubble here going into the early 90s in Japan. Uh again, you know, you can draw whatever par parallels you would like with the S&P 500 or say the NASDAQ. uh and then it popped in 1990. It popped and the stock market sold off over 80% uh from 1990 to 2003. Now the NIC has since recovered uh and is actually back to a new all-time high is not a new all-time high inflation adjusted uh but is a new all-time high. Uh and so it’s important to to for the context uh that to note that Japan’s economy uh from coming out of World War II to now is much different. Uh same thing as the US, our economy coming out of World War II, we had actual industrial capacity. We could actually build things. Uh in fact, we rebuilt Europe and and most of the world that was so badly damaged by uh by World War II. uh that includes Japan uh who we you know uh clearly in World War II just utterly destroyed uh and and the economies were much different uh so it’s difficult to draw parallels uh from say the 70s or 80s to now because both in Japan and in America uh you know we were not running the sort of trade deficit current account deficit that we were back then Japan likewise was not as nearly as liberalized and kind of capitalistic as they are today. So, uh you know, in the 70s and 80s, American businessmen went around the world and tried to liberalize the world. Uh whether it was Russia or Japan, we went around and tried to liberalize economies. Um and sure enough, we were able to get some of that liberalization in Japan. And some of it fueled and caused uh this asset bubble that we saw that we see here in in at least the stock market. Uh so but it’s important to note that before that so going back to say the mid60s uh Japan was starting to emerge right they were starting to uh recover from World War II and the utter devastation of World War II uh and come out of it and certainly by the 70s Japan was really starting to take off. By the 80s it was surging. In fact uh people were calling it Japan Inc. Japan Incorporated. uh there were concerns among the west uh even in the US which by the way we were not running a current account deficit. We were actually you know very uh we had significant industrial capacity uh industrial might. So it was even back then with that industrial might. We were worried here in America that Japan would overtake America in terms of economic output and it was not for for you know no good reason. GDP per capita uh going into 1991 from 1962 until 1991 grew by 322%. Nominal GDP going into 1991 uh grew at 6,760%. Of course, personal savings was surging as well because they were running such a large current account surplus. Here uh is the NIK. So again, this is just a longer term time frame. uh look at the nic then we’re looking at uh GDP on a year-over-year growth rate basis. So uh in the in the 60s certainly by the 70s the electronics and automobile sectors in Japan were were quite strong. Now it’s important to note I had mentioned that Japan was not nearly as capitalistic or liberalized. Uh Japan’s uh central government the federal government played a much heavier role in say industrial and trade policy. They had something called the ministry of international trade and industry. uh and and this uh you know was they they closely coordinated uh what you know we in America would say uh you’re coordinating monetary policy with you know free market industry well to them that’s just how they approached the economy and actually it worked quite well we had just looked at their uh GDP GDP per capita personal savings that you know the average Japanese person was actually doing quite well with that kind of mixed economy or much less capitalistic approach Now there are certain things Americans might look down their nose at. Uh we might call certain practices say monopolistic but that’s just how it was in Japan. Uh now of course all that changed in the 80s with uh some of the liberalization efforts and um and of course uh deregulation that occurred not just in America but also in Japan as well leading to a you know a rise in speculative behavior, risky um activity, risky lending. Uh but back then you know in the 70s and into the 80s uh they were much more mixed economy they took uh the government took a much more active role uh coordinating monetary and fiscal policy with the industrial and trade policy side. Uh this fueled uh and and then into the 80s I mean that fueled strength that fueled growth fueled you know a couple uh uh what some would call monopolies uh or oligopies but uh it fueled strength nonetheless. Then by the 80s, uh this was when American businessmen kind of went around the world were trying to really push this deregulation and kind of liberalization of financial markets and economies. Sure enough, we were successful in Japan. Um and so this fueled a massive bubble. Uh it was not only the growth, I mean Japan was having uh very significant GDP growth, very significant real, you know, GDP per capita growth. their economy on a real basis. It was actually growing at a very strong rate. Of course, uh you know, in a bubble, things get disconnected from reality. Uh GDP on a year-over-year basis, just for perspective here, 1988, uh reached 9%. Here, uh in 1990 going into kind of the pop, uh it was 8%, 7 12%. Uh as well as here in the mid 80s, uh where it was, uh 7% as well. Uh so, so it was working. uh to some degree uh if you were uh in the stock market or in the real estate market. Here’s the real estate market. Uh this is lined up to the same date time period. Uh so it’s the same same same time period. I tried to line it up the best I could. If you were in the real estate market, if you were in the stock market, this was great for you. You loved the speculative behavior. Uh the stock market for example uh increased here let’s just say from 1982 up until here 440% uh real estate values similarly surged uh and in fact uh re the real estate market of Japan was so crazy that they actually uh the value of the central garden the the the central government’s garden uh I guess the equivalent would be maybe the national mall it’s a tiny little garden uh in the royal palace. That tiny little garden, I think it’s like one square mile, was worth more than the entire real estate value of California combined. It was worth more than the entire real estate value of Canada combined. Um, and so the bubble, uh, it’s really hard to kind of understate just how significant the bubble was. Now, part of this was due to the money supply. So, I had mentioned liberalization efforts. I had mentioned deregulation. There was this huge push by again by American kind of Keynesian businessmen to go over there and encourage them to be much more lzair, much more capitalistic, much more Keynesian. And sure enough, they adopted uh those suggestions. And one of the things that fueled the bubble was a massive growth in the money supply. So hopefully here in white, you can see the money supply percentage change uh from 1968 onward. you can see that it starts to curl up. Uh so this is a regular chart uh but it starts to curl up and and start to go kind of parabolic. Now the reason for this uh is twofold. One there was massive deregulation and two there was an encouragement by the central bank and by the central government to lend money. In fact, if you were a young couple looking to go buy a house, say it was a million yen and you wanted to buy a house, the bank would give you a million and a half yen. uh even though the house only cost a million yen, uh they would give you a million and a half. So they were uh really really really encouraging lending. Well, remember private banks create money. Private banks just like the government, just like the Treasury or the Mint, the private banks can print money as well. When a private bank extends a loan, a new loan, that is printing money. Um and we can see that reflected in the M2 money supply. It starts to curl up and go parabolic. Uh and clearly this was during the period of time where you had that kind of final leg higher in say the nick or we were looking here at the the real estate market where again uh one tiny little garden was worth more than the entire real estate value of California combined. Well, clearly that all popped. Uh why did it pop? It popped in 1990. And so it’s important to look at the Plaza Accord. Uh if you’re familiar with the Plaza chord, you’re probably thinking to yourself, it’s the Plaza chord, it’s currencies. So, let’s look at that. So, here is the dollar index. This is a basket of currencies uh that the dollar is compared to. So, as the white line is going up, the dollar is strengthening in general. Uh and then in red, we have the dollar yen. This is the specific exchange rate for just the dollar yen. Just comparing the dollar to the yen. Remember, if the dollar is weakening uh relative to the yen, the red line will go down. If the dollar is strengthening relative to the yen, appreciating faster, the red line will go up. And so, here in 1985 was the plaza cord. And what this was was a monetary reordering uh of the major economies in the world. Uh and the reason for this is that the dollar had strengthened so much uh going into 1985. Uh it was just going vertical. Well, remember this might sound like a good thing, but if you are trying to export goods, if you’re trying to sell stuff to the rest of the world, a strong currency, especially an overvalued currency, is actually the opposite of what you want. Uh, and and you know, we started to run a kind of a trade deficit in 1982, current account deficit in 1982, but there was at least some understanding by American policy makers uh that this appreciation in the dollar needed to be reversed. it was too much. Uh they yes we ran a trade deficit current account deficit but there was at least some recognition that running a massive uh that having a massively overvalued currency was bad for us. So we uh you know had the plaza accords which was a agreement by the major economies to weaken the dollar to devalue the dollar relative to their currency. And sure enough, we can see that the dollar versus the yen similarly depreciated uh going into the the you know from 85 into the early 90s. Now remember for Japan you could think of this the opposite way. If the dollar was weakening that means the yen was strengthening from 85 through to n you know the mid90s. It looks like it set a bottom in 95. So for 10 years from 1985 to 1995 the yen was strengthening. Now for Japan we mentioned that electronics industry that automobile industry they ran a massive current account surplus. So the opposite of America where we run a trade deficit. Uh in Japan they run a current account surplus meaning they export more value than they import. Um this means that they accumulate national savings. Now, here uh is industrial production on a year-over-year basis. Again, you can see uh that from the 70s into the 80s and early 90s, industrial production uh growth was very very high. It was above, you know, 7 8 9 10%. It was very very strong. Well, we can see the current account surplus that Japan enjoyed. So, here in ‘ 87, uh they were running a 4.3% current account uh surplus relative to their GDP. This is very very high. Uh here we can see it’s at a a new all-time high going into ’08 4.7. Uh but anything really above three and a half or four percent is considered very strong. Uh and clearly we can see you know uh the effect that recessions have on uh other economies not just the US. These red shaded areas are US recessions. Uh but clearly affects the rest of the world as well. But in general Japan ran a current account surplus. So what this meant is that they accumulated savings. Again, what a current account surplus means is you are selling more stuff to the rest of the world than you are importing. Then you are you are you are receiving more money for your goods that you’re selling to the rest of the world than you are paying to the rest of the world for their stuff. Um so hopefully that makes sense. Well, you accumulate in general on a national level in the aggregate you accumulate savings. Now on the opposite end uh is the US where we run a massive current account deficit. It’s actually even worse than this. This data is lagged. Um it’s closer to 5%. Um but the US runs a massive current account deficit. And so the only thing the US can or any twin deficit nation can accumulate is debt. So while a current account surplus country uh can accumulate these national savings and we see that reflected in in the personal savings rate for example uh you know on the other hand if you run a current account deficit or a trade deficit like the US the only thing you can accumulate is debt. This is part of the reason the US is in the debt crisis and fiscal crisis that it is is because we run such utterly insane uh trade deficits, current account deficits. uh really on a national level the only thing we can accumulate is more debt. While on the other hand, Japan can accumulate national savings. They have uh what’s called a net international investment position. Uh this refers to the difference between what foreigners own of their assets versus what Japan owns of the rest of the world’s financial assets. The difference between those two values is called the net international investment position. And then you compare it to the country’s GDP. So for the US, our net international investment position or or NIP NIP is negative 100% of GDP. Uh I’m not familiar with any country in the history of the world that has ever had a NIP that low. Well, Japan’s NIP, for example, is positive 80% of GDP. It’s actually 85 closer to 85% of GDP. So running these current account surpluses over time uh has meant that Japan has accumulated huge amounts of not only savings uh but those savings are put into assets right like for example US treasury bonds. This is why Japan became the largest buyer of US Treasury bonds is because they were running such a strong uh current account surplus. Well, if your currency starts to appreciate as it it was doing here, this is horrible news for your type of economy. If you run a trade surplus, a current account surplus, this is horrible, horrible news. Uh because what this means, a strengthening currency, remember as the dollar is weakening that put another way is the yen strengthening. Uh this means that your stuff is more and more expensive for say the US. uh it would now the yen was strengthening against other currencies as well. So all that stuff that that had made Japan so successful, you know, their their uh current account surplus uh that had accumulated savings, national savings, right? They were uh uh receiving more money uh for their for the stuff they were selling than they were spending on stuff from the rest of the world. current account surplus because of this. Uh you know that that strengthening in the yen was was quite scary. Uh because that was you know that was their entire uh economic model was to run a current account surplus to uh to sell more stuff to the rest of the world than they purchased from the rest of the world to accumulate that national savings to run a current account surplus to not be a debtor nation to be a creditor nation. Um and sure enough here we can see debt to GDP. So here in 1991 their debt to GDP was 65%. Uh US was actually lower here uh in 1991 it was 60% but uh they were growing roughly in line. Then of course the last decades hit and Japan debt to GDP just absolutely skyrocketed. This is one of the reasons uh why the lost decades were allowed to happen. their debt uh their leverage ratio their their debt uh the amount of leverage in the system was low enough that they could stand uh some degree of deflation. Now the US at 120% debt to GDP and certainly Japan now at 230% debt to GDP uh you get to a point where the central bank just basically has to print uh money to buy all the all the debt. uh and and Japan took this to a a radical level with yield curve control and negative interest rates and all that. Uh but the point here is that you know if you are a country that that relies on selling stuff to the rest of the world, you cannot have a currency that is getting too overvalued uh like they felt that it was here after the Plaza cord. Now it’s important to point out the dollar right now the DXY index is at 97. uh back here in 1985 at the peak going into the Plaza Accord on a purchasing power parody basis the dollar was actually more less overvalued then than it is now. Or put another way the dollar today around 100 is more overvalued on a purchasing power parody basis than it was here in 1985 going into the Plaza court. So I think that’s important context. Well, uh, you know, the strengthening yen again was worrying them because they relied on running a trade surplus, a current account surplus. So, you don’t want to have too strong of a currency because that makes your stuff less competitive for the rest of the world. So, what did they do? Uh, well, in an effort to kind of offset the appreciation in the currency. Here we can see the green line uh coming down here. In an effort to offset that, they cut the interest rate. So, here is the real rate. So this is called this you take the interest rate and for for this example I’m using the central bank overnight interest rate that the central bank sets uh and then you’re subtracting out the inflation rate and we can see that generally you know going into the plaza cord the real rate was above 3% meaning uh global capital would make a positive 3% return over inflation uh if they bought the yen and then bought uh you know short-term bonds. Now what the you know one way if you’re trying to weaken your currency uh to offset strengthening in your currency one way you can do that is by cutting interest rates because what this means and we can see at the bottom here they ba the real rate basically got down to 0%. What this means is that if I’m an American and I buy I sell my dollars to buy yen and then buy short-term government bonds I’m making 0% money uh uh over inflation I’m making basically nothing. I’m making like 10 basis points. Uh and so by cutting your interest rate down to zero uh or even below the inflation rate, that would be a negative real rate. Uh what that can do is discourage disincentivize the rest of the world from buying your currency and and then buying bonds with the the yen. Uh and sure enough, it worked. And we can see that the yen started to appreciate. Put another excuse me, depreciate. the dollar started to appreciate uh following those cuts in the interest rate. So the dollar started to reappreciate or put another way the yen started to weaken. Uh this is what they wanted. They wanted a weaker currency because again that in that means the rest of the world is encouraged is incentivized to buy their stuff. That is what had made their economy so great and in general makes economies great. That is why China’s economy is so strong. they run a massive current account surplus. They are a creditor nation as opposed to say the US which we know is a debtor nation as we can see from this chart. Well, by doing that um you know this was at the same time as an asset bubble. This was at the same time that M2, right, the private bank side was encouraging lending, right? They were giving even more money to for mortgages than the house was worth, right? So, private banks were lending more and more money. Well, on the other hand, you had the central bank cutting the real interest rate uh down to basically zero uh which again is stimulatory, inflationary on kind of the financial plumbing side uh for for the financial plumbing on that side. Well, that that was being stimulated by a 0% real rate by the central bank at the same exact time that you had the private banks uh increasing, you know, greatly increasing the amount of uh yen creation, private credit creation by the private banks. Um and so sure enough, this fueled both of them in combination, right? the central bank actions as an effort to try to counteract the strengthening of the yen uh cutting the central bank interest rate. Well, likewise, private banks were also extending more and more credit driving inflation, driving the asset bubble. Uh and we can see that here reflected in the nick and of course remember uh here is the real estate market. Uh it also fueled a bubble there as well. Well, the bubble started to get to a point uh that it started to concern and worry the central bankers. So, in 1990 uh you know because the the central bankers and and policy makers were so concerned with the kind of absurdity of the the asset prices uh they started to raise rates. Uh so they took the interest rate here uh the actual central bank interest rate was not zero it was 2.5% but of course the inflation was 2.5% so you get a real rate of zero but the actual central bank interest rate nominally was 2.5%. uh at this time when you had 0% uh real rate. Well, uh the Bank of Japan because they were so alarmed by the asset bubble uh they hiked uh and they hiked that central bank interest rate from 2.5% to 6%. Um and clearly we can see that reflected in the real rate. Uh they got back to that kind of 3% uh real rate. Meaning again uh you know if uh uh someone in the rest of the world were to buy the yen you know sell their currency to buy the yen and then buy a bond a jack you know short-term government bond in Japan they were making a positive 3% real return. Now remember the real rate is restrictive. The higher this goes the more restrictive it is. And sure enough uh they got their wish and that uh by by hiking rates by raising rates that uh absolutely popped the bubble. Um that created a banking crisis. You know banks were heavily leveraged uh and and corporations were also heavily leveraged. Uh non-performing loans were estimated at like1 trillion US dollars worth which I think worked out to like a hundred trillion yen. uh the degree of the crisis was so severe. Uh clearly we saw what it did to the stock market. Well, it also did the same thing to the real estate market as well. Real estate uh value, you know, property prices crashed as well. Uh and the reason for this is that it uh you know, the leverage during a blowoff top when private banks are are are extending more and more credit, they’re taking more and more risk, especially if you can’t get a positive return. If you cannot get a positive return with say buying treasuries, government bonds, if you’re getting 10 basis points real return over inflation, well, you have to take more risk, right? So that’s kind of the goal with uh zero real rate or a negative real rate uh is to stimulate lending. Well, they got their wish and uh whether it was the private banks uh lending way more money than they should, becoming way more overleveraged than they should. Uh of course, you know, the central government had issues and with yield curve control and all the things we covered uh kind of you know uh from the from the following uh following the the the pop of the bubble. uh we covered that in the other video, but uh you know both sides suffered uh significantly and unemployment shot up uh and it and it really brought uh the bubble to a heel and and popped it in pretty uh pretty short order. So we can see here from 1990 it was uh January 1990 uh up until here in September. So, not even a full year, the stock market market declined. The nicade declined by 47% in just about 9 10 months. Uh, real estate values crashed as well. They didn’t crash as fast or as much. Uh, but very very significant real estate correction in in real estate prices as well. Uh, clearly it lasted for a long time. This is the last decades that we kind of uh went over in the other video. So, I I’ll link that at the end. Uh but yeah, you know, when when you the other side to encouraging uh liberalization, encouraging risktaking, encouraging deregulation and a ton of uh credit creation or money printing. Uh well the other side to that is eventually an economy can get to the point where it’s so overleveraged uh that even a tiny little uh hike in interest rates. I mean we can see that the real rate when the bubble popped was no higher than it was back here in the in the early 80s. We had a real rate back here of over 3 and a.5%. So the real rate itself was really not that much higher. uh it’s just that so much leverage had been taken on down here as zero and what you know 0.5 and one right as that as the central bank was cutting interest rates to try to weaken the yen uh to bring back that current account surplus uh as they were doing that the amount of risk takingaking just piled up and piled up and piled up that’s what causes a blowoff top in say a stock market or real estate market but then what that means is that there’s a bunch of bad debt And so the minute that they hiked rates, even just uh again to a historical norm, a historical average of say 3% real rate, that alone was enough to pop the bubble. Um and so this is a warning in what can happen. uh you know if if if you take the private uh credit creation and the kind of liberalization to such an extreme as Japan did uh you know it can it can create a a an asset bubble uh the likes of which really haven’t been seen uh for for a long long time. You have to go really back to say uh going into the great depression you know the roaring 20s of in for to see this sort of bubble in America. Uh now some would say that the bubble that we are currently uh some would say that the current conditions we are seeing are a bubble uh and it must pop much like Japan. I would point out two things. Number one, our debt to GDP is 125%. So we cannot allow for deflation. We cannot allow for collateral on a real uh the real value of the collateral to fall too much uh or we go into a debt spiral. I would also point out that throughout the entire period of time, Japan ran a current account surplus. They ran a trade surplus. The US on the other hand runs a massive current account deficit. And likewise, Japan has positive net international investment position. Japan has accumulated savings because of this current account surplus. Their country as a whole and overall has savings. for example, they got over a trillion dollars of US Treasury bonds. On the US side, we have negative savings. Uh in fact, we just have more and more debt. So those are two critical differences that uh number one, the debt to GDP is too high to allow for a sharply deflationary spiral. It would cause an imminent uh debt debt doom loop uh here in America. But also uh the net international investment position is so negative 100% of GDP negative 100% of GDP compared to Japan where it’s a positive 80% of GDP so they have savings we have debt um and also uh from a defense standpoint you know they they have a lot of their defense costs basically subsidized by America so there are a lot of key differences of course demographics are slightly different as well uh there there are more significant or or you know a greater number of differences uh that we won’t go into here but I think those are the main ones uh you know the fact that they have ran a current account surplus accumulated national savings uh meanwhile the US has run a current account deficit is a debtor nation and has only accumulated debt no negative savings actually uh that’s a critical difference also as well debt to GDP being this high uh just cannot in a highly levered you know 20 30 to1 uh leveraged system you cannot allow for the collateral to fall uh in value otherwise you go into a into a debt doom loop into a into a a debt spiral. So uh you know in my opinion it you can’t really draw parallels. They’re two uh totally different sorts of uh situations. Uh but anyways I I hope that it was at least somewhat instructive on kind of how the bubble got blown. It’s very, you know, in some ways it is similar to America with uh kind of reckless um central bank policy, monetary policy. Uh but in a lot of ways, Japan is quite different from America. So anyways, hopefully that was helpful. Uh and I will catch you in the next

From economic powerhouse to an economic depression called the “Lost Decades”- what happened to Japan?

It’s the 1980s, and Japan is an economic juggernaut. Skyscrapers are rising, the Nikkei stock index is soaring, and Tokyo’s land prices are worth more than entire countries. Sound familiar?

It’s a story of dizzying highs and crushing lows, not unlike some of the booms and busts we’ve seen in the U.S. and some are asking if the US is due for a similar bust

In this video, we’re diving into Japan’s wild economic ride from 1980 to 2000—the asset bubble, what caused it, and what happened when it popped. We’ll also compare it to the U.S., exploring what these two global giants have in common… and where their paths diverged.

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