We recently outlined some striking similarities between Japanese and US financial crisis management tactics. But it seems that as financial turmoil spreads outwards from Wall Street, others, also, are seeing Japan parallels for almost every (grim) development in finance, business and broader macro-economic issues.
Among the latest, Tony Tan, deputy chairman of the Government of Singapore Investment Corp, warned at the weekend that the world may face “Japan-like” economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis.
“Policy responses so far have tried to minimise the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,” Tan said, reports Bloomberg. “Over the near term, debt deflation and deleveraging in the US and other major developed economies will exert downward pressure on growth in many economies.”
The bursting of Japan’s asset-price bubble in the early 1990s triggered a property and stock market collapse that heralded a decade of stagnation in the world’s second-largest economy, Bloomberg reminds us, noting that since early 2007, financial institutions worldwide have reported more than $500bn in losses and writedowns and the credit-market collapse erased $11,000bn from global stocks in the past year.
So just to add to the nostalgic cheer, Peter Tasker, a Tokyo-based hedgie, seasoned Japan hand and occasional commentator, has gleaned a few salutary lessons for bankers and hedgies from Japan’s post-bubble meltdown and written them up for FT Alphaville:
To anyone who lived through Japan’s post-bubble meltdown, the current global financial mess seems eerily familiar, he says:
The ever-rising tide of bad loans and asset impairment charges. The complacency of the authorities when confronted by the collapse of venerable, century old institutions. The initial schadenfreude as real estate firms imploded and leveraged speculators went to the wall. The clever-clever schemes to avoid mark-to-market. The scapegoating of short-sellers and “rumour-mongers.” The “too little, too late” policy measures. The refusal to deal with the huge deflationary impact of across-the board wealth destruction…
There was even a brief “de-coupling phase” between 1990 and 1992, when it was widely believed that the mayhem in the asset markets would have a limited, or even healthy (“shake out the weak players”) effect on the overall economy. In Japan’s case the denouement was a “lost decade” for the economy, total loss of faith in regulators, auditors and managements, end of the brief experiment with a capital market-driven system, and cancellation of the “Japanese century”.
The Y100 trillion question, then, is whether the world economy, or at least the most exposed sections of it, now face something similar – Y100 trillion because that amount (which equalled 20 per cent of Japan’s GDP) was the total of bank write-offs.
Nobody is forecasting that scale of problem currently unfolding, but then again, neither was anyone in Japan in 1991-92. What started as an asset market problem became an economic problem and then a banking problem and then an even worse asset market problem. The vicious cycle carried on turning until there were virtually no sound banks left (and remember: Japanese banks had the highest credit ratings in the world in 1990) and Japanese finance had become a laughing stock of the world economy.
Bearing in mind that nobody knows whether this is the end of the beginning or the beginning of the end, here are a few lessons from the Japanese experience:
1. In order to head off the debt/deflation vicious spiral, monetary policy needs to be extraordinarily stimulative. The risk of runaway inflation is minimal.
2. Fiscal policy has a job to do when the money multiplier collapses. Forget about crowding out – bullish bond markets will absorb all the supply they can get.
3.”Strong hands” ( investors with risk-taking capacity) are like gold-dust. The sovereign wealth funds of emerging economies are now in the position to play the role that hedge funds and vulture funds did in Japan and Asia in the 1990s. They should be welcomed, not shafted, criticised, or over-regulated.
4. Forget about moral hazard. Somebody has to take the credit risk. Future generations are the best candidate because they’re going to have a better life than us, with all kinds of cool gizmos and hobbies. They won’t notice, really.
5. No schadenfreude. Never ask for whom the bell tolls. It tolls for thy portfolio.
The ‘Japanification’ of Wall Street – FT Alphaville