What happened to the economy of Japan?

 Japan’s Bubble Proves Markets Needs Rules- Singapore did it Right

As I dabble in matters of economics, purportedly to get a deeper perspective of happenings in the world, I have just come across the sovereign nation of Japan- and the baffling situation it finds itself in today- and actually has been in for several decades. 

As is well-understood, the 70s and 80s were the salad years for this nation. Manufacturing, particularly automotive and electronics, were dominating the world and it was a powerhouse economy that the world was dying to engage with. Anecdotally for me, I was struck by how every rock band of every fringe genre always played at the Budokan in Tokyo or in other venues in Osaka. Deep Purple came up with a seminal piece of work called "Made in Japan", which had the punchy arena tune  "Woman from Tokyo" on it. Similarly, in the early 80s the American band Styx wrote an enigmatic and somewhat dystopian tune based on the proliferation of Japanese technology - Mr Roboto- which I have always found really catchy.  

During this period, Japan had trade surplus, low employment, high inflation- pretty much all the features of a galloping economy. 

However, there was silently developing an Asset Bubble like none before. Real Estate and Stock prices went to the stratosphere. I am told that the price of real estate in Tokyo was $139000 per sq meter. And stocks were trading at 70 times earnings. And as I have observed earlier, the Central Bank of Japan probably did not worry too much about this since it is not their express remit to do so. The government is also not easily in a position to control asset bubbles, certainly not  equity bubbles as these are internationally tradeable and liquid- one nation cannot easily control them. Real Estate, on the other hand, probably could have been somewhat better controlled- but again because of political reasons, such decisions were not made. As as result, come 1991 there was the mother of all asset crashes, wherein prices fell by as much as 80% and the yen depreciated immensely.  

This, as we now come to see, was a terminal shock. Because of this shock, Japanese consumers had a shift change in psychology.  They went into a tailspin of fear and conservsativeness, wherein they just would not spend on anything and kept on saving in the hope that the curency would eventually appreciate and they could afford to buy more. To offset this implicit consumer sentiment, the Central Bank of Japan had to keep the interest rate at zero or close to it- again as we have seen before, to push the consumers to spend the money because if they chose to save it , it would not yield anything. And this cat and mouse game has gone on for decades with the Japanese economy in a relative standstill. This is further exacerbated by the lack of demographic dividend. During this 90s onwards, although I haven't cross-checked this, one can surmise that people did not only not spend, but did not even bother to have kids, all on account of this austerity that they had self-inflicted on themselves.  Now it had an ageing population with one of the lowers replacement rates in the world. So, in other words, not only do consumers not consume like before, but the number of consumers is also gradually coming to a grinding halt. Given its anti-immigration stance in general, it is difficult to see how it's economy can grow even if it had the opportunity to do so. 

There must be a lesson for the world in all of this. Which is back to the rather fundamental question of whether institutional intervention in free market economies is warranted, as opposed to what is called the “Laissez-Faire” approach where no one does anything. It cannot be more clear that atleast when it came to Asset Bubbles, intervention might just be what saves the world.  Most capitalists ( and certainly American ones)  are of the belief that there should be no intervention- but one can easily see that these are people with vested interests- perhaps they are already wealthy and are  hence happy to see the swell in the balance sheets.  If you suggest something like this, there seems to be unnecessary enthusiasm  to place you in a "commie" basket, as if doing so makes the idea automatically vicious. 

Japan went from a savings rate of 5% to 26% owing to this 1991 debacle. I would say that Japan was already rich and so that is about the only reason this did not destroy the society completely- but it has had obvious broader societal impact- something that is simply not spoken of enough.  To contrast, it may be worthwhile to consider Singapore. Singapore, for one, has taken steps to control real estate asset bubbles using many policy controls that I wont go into- and seems to have been succesful at it.  It make me laugh because every time I speak with a Singaporean friend, he or she complains that their government only cares about rich people. If only they did some homework they would find that given Singapore's inherent constraints of size and demography, it is perhaps the only nation that thinks more deeply about matters that are central to their "commoners".  Subsidised housing, price control, food coupons for seniors, subsidised and excellent schooling, low priced utlities, free public library (which is incredibly well-stocked) , cheap and excellent public transportation, free and impeccably maintained nature parks and open spaces to excercise and rejuvenate- the list goes on. I will submit to you that if you are an ordinary person, there is no better place to retire than Singapore.

In summary,  all of this writing is to make one ponder more deeply about letting Asset Prices rise wantonly. There may not be any major issue, or they might end up being a permanent and irreversible issue for the several generations hereafter. This may be construed as  fear-mongering but it is based on a logical conclusion from  publicly available information-  as opposed to, say, the diagnosis of the  friendly neighborhood physician that you go to see at any point after age 40. What’s more,  Singapore created referees while Japan trusted markets.  There seems to be a clear winner here, which suggests that this fear does not need to come to fruition.