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Has Japan Finally Recovered From Three Decades Of Deflation?
Is Japan finally back?
A few weeks back, I wrote about the crash in the Japanese yen. Today I want to take a look more broadly at Japan’s economy. Japan is interesting because it paints a cautionary picture for where today’s big and indebted economies like Europe and China might be headed if they aren’t careful.
America too perhaps. One thing that massively differentiates America from Japan though is that America is much more immigration friendly. Its leading universities and companies attract the best and brightest from all over the world and its relatively friendly immigration policy allows these folks to build their careers and lives here. Donald Trump and his cronies seem to be itching to change that, but at least for now this remains a huge difference maker that prevents America from stagnating like Japan.
Bubble and crash
So what ails Japan? If you were around in the 1980s, you might remember how Japan seemed poised to take over the global economy with its dynamic world-beating companies (e.g. Sony, Nintendo, Toyota, etc.), innovative technology, and highly disciplined and educated workforce. The hype around Japan created an investment bubble of epic proportions. Stock valuations and real estate prices went to the stratosphere before ultimately crashing. And Japan basically never recovered from that crash.
After the crash, Japan’s banks stubbornly held onto bankrupt loans, pretending that these were still viable assets. In order to not sustain massive write-downs and face the risk of their own bankruptcies, Japan’s banks entered into an elaborate game of make believe with their borrowers. By extending money to keep questionable businesses alive, Japan’s financial system was effectively throwing good money after bad. And by prioritizing this extend and pretend strategy, Japan’s banks starved actual quality businesses, projects, and consumers of capital. Thus, productive credit growth ground to a halt and the economy entered into deflation.
Deflation killed the economy
Deflation, once entrenched, is a killer. It kills economic growth because when prices go down year after year, consumers and businesses put off their…
