Japan earned an enviable post-war reputation in economic circles as a model of efficiency, ingenuity and innovation, but for the last 25 years the brilliant rising sun of Asian economies has lost a lot of its lustre. So where did it all go wrong and what are they doing to recapture former glories? As you would expect, they certainly do have a plan to get their economy buzzing again, but how is that progressing and what does it mean for Australia’s fortunes?
The road to boom and bust
Japan emerged from World War II as a shattered nation. In the decades prior to the war it had established its credentials as an industrial powerhouse, but the disastrous effects of conflict had decimated its economic capacity with around 40 per cent of the nation's industrial plants and infrastructure laid waste.
Out of the ashes, however, Japan quickly re-established itself, partly due to the influence of U.S. occupation but more significantly as a result of the cooperation of manufacturers, banks, an interventionist government and a motivated labour force. The transformation was dramatic and profound, as Japan’s renowned industrial prowess and technological know-how resurrected the country’s fortunes.
The 1960s was tagged as Japan’s “golden decade”. By 1965 GDP had grown to over $91 billion and it had become the second biggest economy in the world, behind only the United States. Exponential growth continued into the seventies and by 1980 GDP had reached a heady $1.065 trillion.
This success had propelled Japan into the pre-eminent source of capital in the world, usurping the United States from that position. The stock market also reflected this success and it even surpassed the US market in total value.
The 1960’s was tagged as Japan’s “golden decade”
So where did it go wrong?
The rapid rise of Japanese industrial and financial success had created an atmosphere of overconfidence and what turned out to be an unhealthy hunger to take on risks. The banks exercised increasingly loose lending practices funded by massive borrowings of tens of millions of Yen from overseas capital markets. Japan’s eyes had perhaps grown too big for its stomach.
The overconfidence began to fuel the real estate and stock markets with prices inflating to unprecedented and unsustainable levels. From 1985 to 1989, Japan’s Nikkei stock index tripled. Compounding the fragility of the bubble were some suspect financial reporting practices, which saw speculative profits and capital gains reported as income on company balance sheets and distorting the true picture of just how tenuous they really were.
The end of 1989 saw these excesses hit their day of reckoning. Official concern over the ballooning asset bubbles resulted in the Bank of Japan tightening its monetary policy, which began a chain reaction. The Nikkei stock market plunged by nearly 50% during 1990 and the crashing stocks had a domino effect on the real estate market, which also headed south.
This ushered in a period of prolonged stagnation, the effects of which are still being felt today. From being the world’s biggest creditor prior to the crash, it is now the world’s biggest debtor. The stock and real estate markets still sit below their late 1980s highpoints and the economy continues to drift in and out of recession.
The advent of Abe-nomics
In an attempt to break the cycle nearly twenty years after the bubble burst, Japan embarked on a new approach to recapturing economic growth and stability. Named after the Japanese Prime Minister who was one of its architects, Abe-nomics was implemented with high hopes of halting the decline.
At the core of the plan was an aggressive monetary policy, whereby the central bank set persistently low and negative interest rates, while injecting cash into the system by effectively printing money (euphemistically known as quantitative easing). This was complemented by ambitious government spending, reforms of the labour market and liberalisation of industry protections. Some would also say that a rekindled sense of nationalism, centred on its relationship with old foe China, was part of the plan too.
The objective was to stimulate consumer demand, promote inflation, support exporters through a favourable Yen valuation and encourage stock market activity. While there was some initial positive response from this approach in terms of increasing stock market prices and a lowered exchange rate, there was little effect on economic growth or inflation and by 2015 Abe-nomics seemed to have run out of steam. The stock market has since fallen back and the Yen has risen.
All is not lost, however, as a new round of government stimulus is now on the cards and the expected rise in the US dollar and interest rates may see the Yen devalue again, thereby increasing Japanese export competitiveness. Time will tell if Abe-nomics may bear the fruit Japan so desperately needs.
Japan’s relationship with Australia
Japan and Australia have enjoyed a strong post-war trade relationship and during Japan’s golden decade, it surpassed the UK as Australia’s largest export market. Despite Japan’s domestic problems in more recent times, it remains our second largest export market behind China. Our trade relationship should continue to flourish with a new trade agreement signed in 2015, providing greater access to Japanese markets for Australia's exports.
Australian share and property markets have been beneficiaries of the Abe-nomics stimulus, the low Japanese interest rates and the low exchange rate. These factors encouraged demand for Australian assets from Japanese buyers and this has been aided by Japan’s relatively cashed up corporate balance sheets. Any further stimulus packages may see our markets benefit yet again, especially if US exchange rates and interest rates continue to climb.
Historical and contemporary factors point to Japan continuing to be significant to us in a trade and investment sense and the dynamic relationship we share is a positive one for personal investors in Australia.
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