Tuesday, February 17, 2009

"The Bubble" Recovery Finally Coming Back to Bite Japan?

January 1990. For the next two years, Japanese stocks fall 60%. The Nikkei index of the Tokyo Stock Exchange soon became half what it was in the heyday - approximately 39,000 points. Bank loans amounted to nothing. The economy is still in debt for trillions of Yen.

Fact: The Japanese economy is the second-largest in the world.

How did they do it?

One of the reasons Japan prospered during the Bubble was its financial analysis model: prices do not fall. Land value always increases. Stocks must go up. On the whole, this is a terrible way to do business; if, on the other hand, you have a Gross National Product that can't help but increase by an ungodly percentage (about 6%, I believe) for over a decade, and your citizens are convinced in the stability of the Yen, it works surprisingly well. When the GNP did fall in early 1990. and the country effectively had no way to deal with these losses, the entire system should have collapsed in on itself, similar to the 1929 crash in the United States. But it wasn't to be so in Japan. Why?

People still had faith in banks and stocks that were guaranteed NOT to produce any income. The government kept spending, and most of the burden in recovery during the 90's was absorbed by your average salaryman wanting low taxes and a reasonable pension. Many financial analysts around the world couldn't get their heads around how the country had basically ignored the fact that trillions of Yen were due to be paid in some form.

Now it finally may be time for a true reversal of fate, to make the government aware of the precarious economic situation.

The gross domestic product has dropped at an annual pace of 12.7 percent. In my humble opinion as someone who has studied the Japanese "economic recovery", this was inevitable, the result of staying the course on an economic model completely impractial during both the Bubble and the recovery. Why we didn't see Japanese being taxes 5,000,000 Yen (approx $50,000) in 1995 to attempt some sort of balance is beyond me.

And the funniest part is yet to come. In response to this drop, Prime Minister Aso has supported a 4.8 trillion Yen stimulus plan to pay out to taxpayers (coming to approx. 10,000 Yen/person). Wow. Brilliant. Enough to buy lunch for two. Or maybe just coffee if things keep going the way they are. I know! Let's just will the economy to do the right thing. Gambatte! Fight!

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