Reading an article yesterday in the FT discussing the problems that still plague Japan after their meltdown since the early 1990s led us to some interesting analysis. The question posed was: is the most similar comparison between US and Japan post bubble, or China and Japan pre bubble?
Market commentators are often referencing how the US will face a Japanese style deflationary bust given the over indebtedness of the economy (government and individuals) and the deleveraging that will occur. A credit fueled bubble propelled Japanese assets to dizzying heights in the 80s. A similar, primarily-US, credit fueled bubble propelled assets across the world to new highs. The retrenchment that occurred in Japan led to two decades of lethargic performance, in both the markets and economy. The Nikkei is still 75% below its 1980s peak.
We often hear comparisons to how the US is in the unfamiliar process of deleveraging. That after excessive credit growth for decades a retrenchment is uncomfortable, but 100% necessary. Nomura here describes this as a “balance sheet recession” and is what happened in Japan :
“According to Mr Koo of Nomura, an economy in which the overindebted devote their efforts to paying down debt has the following three characteristics: the supply of credit and bank money stops growing, not because banks do not wish to lend, but because companies and households do not want to borrow; conventional monetary policy is largely ineffective; and the desire of the private sector to improve balance sheets makes the government emerge as borrower of last resort. As a result, all efforts at “normalising” monetary and fiscal policy fails, until the private sector’s balance-sheet adjustment is over.”
This would seem to be counter to what is occurring. Companies are in better shape than ever and only in a doomsday scenario do you see the largest consumer market in the world, reverting to Japanese – style saving characteristics. We for one think govermnent action to date has done one very important thing: restore Mr. Market’s confidence. Back to Japan for a second, Martin Wolf, whom we respect thoroughly describes the root problem of Japan’s weak economy for the past two decades on the corporate sector:
“My own view is that the underlying structural problem has been the combination of excessive corporate savings (retained earnings) and diminished investment opportunities, once catch-up growth was over.”
And here is where Mr. Wolf makes an interesting conclusion: could it be that China is facing a similar bubble risk like Japan was in the 80s?
“Yet Japan’s experience also has a lesson for quite a different economy. It indicates that when very fast growth begins to slow in a catch-up economy with very high corporate savings and comparably high fixed investment, demand may well prove extremely difficult to manage. This is particularly true if the deliberate promotion of credit growth and asset price bubbles has been part of the mechanism used to sustain demand. And who needs to learn this vital lesson now? The answer is: China.”
Please click here to read the full article.
