The Of Rice and Zen staff, along with most of the expatriate population of Japan has been capitalising on the recent comparative strength of the yen against the pound and the dollar. Today £1 buys you ¥161.50, compared to about ¥260 two years ago. It’s a great time to be sending yen home or investing in shares as prices hits rock bottom, but where to go to for some expert advice? Of Rice and Zen has teamed up with SB Asset Management to get some informed advice for expat investors in Japan. Here’s what our economic correspondent Nabil Khan has to say about the state of play.
America’s “Japanese-Style” Recession?
For those of us who live here in Japan we cannot help but be constantly aware of recession. The recession proper struck during the 1990s and lackluster growth followed that throughout the early 2000s. This economic malaise of the Japanese economy was often a point of ridicule for American economists and also an argument for American style de-regulation. A few voices mooted the idea that the United States would be in store for the same economic conditions that the Japanese had suffered, but few were given much credence. Now many pundits are predicting that the US might be in for a similarly rough ride.
However the United States would be lucky to end up with an economic downturn similar to the one that Japan went through. With the political mismanagement and the market reactions to these half measures the situation seems to be heading for something a lot worse. This is because the Japanese at the beginning of the 1990s where in a very different situation to the United States.
After the end of the Second World War the Japanese economy rose from the destruction of the war to become the second largest economy in the world. By the 1980s the US and Japan accounted for almost half of the global economy. Then in 1986 the economy went into warp-drive. The ‘’Bubble Years’’ had begun, The Nikkei soared, credit was super easy to obtain, breakneck industrial expansion. Between 1986 and 1991 the Japanese Economy grew by $965 Billion which at the time was the same size as the total GDP of France. The Japanese were casting a shadow over the United States, the Americans bought most of the Japanese exports and the US military protected Japan.
At that time the second bubble in Japan was growing, that was real estate market. During the 1990s a square meter in Ginza was going for 30 million yen. Housing prices went through the roof, families started taking out multi-generation mortgages. The most famous example of this overheated market was that the land that housed the Imperial Palace in downtown Tokyo; it was estimated to be worth more than the whole state of California.
Then the two bubbles burst, and the initial response was one of denial. Then once economists did finally start to address the issues they handled the ball like buttered soap. Japans best and brightest couldn’t stop the situation from going out of control. Experts across the Pacific conceivably cracked a smirk at the thought that the United States would have fixed the situation quickly and effectively just as they had done with the Savings and Loan situation.
What followed next was a long protracted recession. There was however low levels of unemployment and the situation on the ground didn’t seem as dismal. Japan’s dearth of duty-less jobs are a throwback to this period and one of the reasons for the relatively high employment rate. However the Japanese economy was unable to pick itself back up. There was economic expansion and contraction. The government invested heavily into massive infrastructure projects, but the damage couldn’t be contained.
After the bubble burst the fear of Japan and its perceived threat to the world, as exorcised in Michael Crichton’s novel Rising Sun lost credibility. Now the mantle has passed to China as the country the Americans have to fear.
So what does a “Japanese Recession” look like? America’s situation could be a lot worse if the response to the situation is ineffective. There were several advantages the Japanese economy had in the 1990s that the US does not have these days. Then, just like now Japan was the largest creditor nation. The United States then and now is the largest debtor nation. Just for the US Federal Government to operate they need to borrow $2Billion a day from international lenders such as the Japanese, Chinese, and Russians.
There is a persuasive argument suggesting that America is one of the world’s poorest countries in the sense that, according to the General Accounting Office, America’s $52 trillion dollar bill breaks down to $175,000 for every man, woman and child. Since it includes non-taxpaying childen, the actual per household burden works out to be $455,000.
Currently it is in the best interests of their creditor nations to keep the pipeline of credit open, however that may not always be the case. Some estimates place the Federal deficit at $750 Billion, which is separate from all the other deficits that the government has racked up in the past. In addition the America has an overall negative savings rate and its citizens are drowning in an ocean of debt, the Japanese are fanatical savers, sometimes to the point of detriment.
With these glaring differences some say the United States would be lucky to end up with a Japanese Style recession. For those of us inside Japan we’ve noticed that investment in Japanese funds has increased and the yen is strong against the pound and the dollar. Although the country will suffer as its major export market in America will have less demand for Japanese goods, there are other markets around the world that are craving Japanese Electronic, Automobiles, technology and know-how.
Nabil Khan is the Regional Director (Kansai) of SB Asset Management; SB Asset Management specializes in Private Banking for Expatriates around the world, their offices are based in Barcelona, Tokyo and Osaka.
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Allen Taylor
