Saturday, December 29, 2012

Why Japan's "Lost Decades" matter

In his post, Let's Cut the Crap about Japan's 'Lost Decade', Marshall Auerbach took on Stephen Mallaby's Financial Times column, Japan should scare the Eurozone, and cited a column by Steven Hill to show that Mr. Mallaby was wrong.

While each of these columns raises interesting points, they all miss out on something very fundamental to the Japanese experience.  Japan has an export oriented economy.

After their financial crisis, the Japanese economy essentially went sideways for over 2 decades while the rest of the world experienced tremendous economic growth.

This point needs to be repeated.  Despite being an export oriented economy, Japan's economy failed to keep pace with the economic growth experienced by the rest of the world.

Do you think this was because Japan Inc. suddenly stopped making attractive products or is this the result of not dealing with the bank solvency led financial crisis and kicking the can down the road?

Regular readers know that this is more likely the result of not dealing with the bank solvency led financial crisis and kicking the can down the road.  Your humble blogger refers to this as the Japanese Model.

Under this model, the burden of the excess debt in the financial system is placed on the real economy.  The result is that capital that is needed for reinvestment and growth is diverted to the unproductive use of debt service on the excess debt.

In addition, under this model, monetary policies like zero interest rates and quantitative easing are adopted.  These policies further deprive the real economy by starving it of demand and economic vitality as savers cut back on current consumption to offset the decline in their savings.

Looked at from this perspective that Japan's economy did not keep pace with the rest of the global economic expansion, there are plenty of lessons to be learned from Japan in how not to respond to a bank solvency led financial crisis.

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