October 29, 2000
Can a highly competitive economy with record export growth and growing international market share go into a slump? It certainly can. Japan is now in its tenth year of economic stagnation, banks are still filing for bankruptcy and, throughout the economy, bad debts continue to rise.
Ten years ago it was all so different. When I was in college, a particularly ambitious set of business students who used to wear suits to lectures (a true sign of recession) began taking private Japanese lessons. If you didn’t have a grasp of Japanese or at least a smattering, the view was you might as well quit now and not even bother turning up for final year interviews.
We sat there, petrified, as professor after professor told us about the threat of Japan to our careers (not that the class of 1988 appeared to have a particularly stellar future ahead of them in the first place). Every airport waiting-lounge was stuffed with hardback tomes heralding the rise and rise of the land of the rising sun and no economics exam questionnaire was complete without the obligatory question: “Explain the fundamental economic reasons behind Japanese world economic domination”.
Japan of the late 1980s was experiencing a huge asset price boom and stocks were going through the roof, allowing Japanese companies to buy trophy assets abroad such as the Rockefeller Centre and MGM. Bulging Japanese banks dwarfed their European and US counterparts and threatened to dominate in the City and Wall Street. Most spectacular of all was the Tokyo property market. In 1990, the land upon which the imperial palace in Tokyo was built was valued at more than the entire real estate of Canada, the second largest country in the world.
So what went wrong? Why is Japan down in the dumps and why did the world’s most awesome economic power crumble in a matter of a few years? More interestingly, if global competitiveness is so important, how come Japan continued to have the world’s largest trade surplus, never dropping a notch in competitiveness throughout the 1990s, and still manage to experience a domestic depression? Finally, should we therefore entertain the prospect of a “competitive recession”?
There are three broad reasons put forward to explain the persistent Japanese slump despite huge government spending, a collapsed currency and low interest rates. The first focuses on the banks. It is argued that because the banks lent hand over fist to finance property and share transactions, they were left with huge bad loans and are practically bankrupt. They are now in no position to lend new cash. Thus the supply of credit is a problem.
The second contention is the once bitten, twice shy argument. People were so badly burned that they will not spend again and they will continue to save no matter what the interest rate. Incidentally, Japanese real interest rates have been negative for much of the past five years. Thus, the demand for credit is a problem.
The third explanation takes the two above and adds demography. Burnt by the 1990s boom/bust experience, the Japanese are getting older and are saving for retirement. As there are insufficient investment opportunities in Japan, this cash is not invested at home but abroad and this explains the current account surplus. This may be the most plausible explanation for the persistence of the depression but it doesn’t explain why it happened in the world’s most competitive economy.
In Japan, two economies operated side by side. Alongside the high-productivity, high-tech exporting sector was a slow, corrupt, uncompetitive domestic services economy. Unfortunately, this latter sector and its employees believed the miracle story and spent as if they were all working for Sony, Hitachi or Mitsubishi. The banks lent huge amounts to the property market and commercial developers were seen as the best bet.
Things started to go pear-shaped with the mini US recession of the Bush years. Sadly, when the bubble finally burst, people in the low-productivity services sector who had seen their wages rise steadily, realised too late that their houses were built of sand. When hard times hit, the domestic economy was neither solvent nor sufficiently innovative to recover. Japan’s exporting sector continued to be a world beater, notching up a trade surplus of $125 billion this year alone. But the tired, indebted, domestic economy — which employs the vast majority of people — has never recovered and remains insecure and depressed.
Therefore, economic statistics on things such as export growth are “virtual” in that they are of no relevance whatsoever to the life of a man facing 20 years of negative equity. What scares me is that the Japanese model of two economies fits Ireland. This week I visited IBM, one of the world’s leading high-tech companies and one of the biggest employers in North West Dublin. Getting to IBM’s futuristic campus by 9am demanded an arduous journey across Dublin at peak traffic hours.
The journey was like passing through one world to arrive at another. My taxi, which arrived one hour late and took over an hour and a half to get to Mulhuddart, sneaked its way through a rainy city reminiscent of Caracas with little public transport and full of traffic, fumes, beggars and stressed drivers fit to be tied. I arrived in a tranquil, clean, modern world — more Southern Ontario than South America. Here the productivity miracle can be seen in operation where educated workers are doing their stuff.
However, in the evening these workers return, as if through some invisible border, to the overpriced, uncompetitive, rip-off economy where people are borrowing like there’s no tomorrow, the infrastructure is creaking and industrial unrest is the order of the day.
Today’s Ireland looks, smells and feels like Japan in the late 1980s Japan. Every time I see the excellent “Take five @ ï¿½200,000″ piece in the Irish Times property section, in which a two up, two down in Stoneybatter costs as much as a chateau in Provence, I think of Tokyo’s imperial palace and Canada around 1990.