Turning Japanese?

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It was back in 1980 when The Vapors released Turning Japanese. This article is not to answer the question “was Kirsten Dunst’s cover of Turning Japanese better?” (work it out yourself, you’ll find both further down this page); rather it’s to consider some of the potential financial planning and economic implications of “turning Japanese”; the Japanification hypothesis.

The Japanification hypothesis?

OK, so perhaps not a full-blown academic thesis, but a growing school of thought among some economists, fund managers and even governments which wonder if developed, but stagnating western economies may have started the journey towards a decades-long low growth period like that which has stubbornly remained in Japan since the collapse of asset prices in the early 1990s. In which time, Japan’s economy stagnated over the Lost Decade (1991 – 2001), the term later extended to become the Lost Score (1991 – 2011). It remains to be proven if the “Abenomics” of premier Shinzo Abe’s “three arrows” of reform intended to quick start Japan’s stubbornly low inflation, stubbornly low productivity and the demographic challenges of a super-aged and ageing society will prevent the Lost Score, becoming the ‘Lost Score plus Ten’.

Some theorise that since the Global Financial Crash, western central banks have essentially created longer and more sluggish periods of growth by trying to delay recessions, potentially amplifying problems in later years by creating bigger asset bubbles and bigger imbalances, all of which conspire to produce much slower economic growth.

Last month the Tokyo 2020 Olympics should have started, we wonder if the twelve-month delay will also delay the increased Japanification focus we expected this summer, or if over the coming weeks will attention turn to Japan’s ‘super-aged’ population (over one third are 65 or older) and the growing trendlines which show western economies catching up (the UN predicts by 2050 the number of over-80s will triple from 143 million to 426 million worldwide)?; Or will there it take a renewed focus on the printing presses of the central banks as they print money to battle COVID. Will  someone realise that this new money is just stuck in the system because real economies aren’t growing?

We think our article in May: “inflation or deflation” provides a balanced argument which explores if deflation (Japanification) or inflation would be worse now for our economy .

a few soundbites

"Japan's "Great Recession" that began in 1990 was a "balance sheet recession". It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their business earnings rather than borrow to invest as firms typically do"

Koo

"the anaemic performance of the Japanese economy since the early 1990s is mainly due to the low growth rate of aggregate productivity"

Hayashi & Prescott

‘Japan tried everything from QE to fiscal, and today is generating very little economic growth.’

Bezalel

“Banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than surviving on bail-out funds.”

Schuman

"Japan's banks lent more, with less regard for the quality of the borrower, than anyone else's. In doing so they helped inflate the bubble economy to grotesque proportions."

Krugman

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