Posted by: union03g | August 6, 2009

Good Article – Why We Are The Next Japan And What That Means

For those perennial bulls that talk about stocks for the long run and how the market always trends upwards, consider this nugget: the Nikkei 225 closed 1989 at its all-time high of 38915.90. Today, it stands just about 7400.

That’s a drop of over 80% during a 20-year horizon, a sort-of epic downfall generally reserved for tulip speculation bubbles. The scary part though is that the current US economic situation, as well as direction of US government policy, greatly resembles that of Japan.

Japan did not have a Great Depression over the last 20 years. People aren’t eating out of miso soup kitchens and unemployment isn’t at 20%. However, they have had well over a decade of economic malaise. Years of virtually no economic growth, no mega contraction, but not growth either. The Japanse central bank has kept rates at near 0%, just like as our central bank is currently doing, but deflation is still an ongoing concern, just as it is in America.

The root of the Japanese economic mailase was a real estate bubble much like ours. In America, residential real estate prices ballooned out of control. In Japan, it was commercial real estate. The peak of Japan’s asset price bubble makes our look mild by comparison. At the peak of the bubble, it was estimated that the land beneath the Imperial Palace was worth more than the entire state of California! Prices in Tokyo’s Ginza district were so high that it cost almost $90,000 per square foot.

Like our banks, Japanese banks provided easy credit which helped fuel this bubble and made many loans that would never be repaid. The Japanese government made efforts to stabilize the banks, but none were sweeping enough to fix the problem for quite some time. Japanese banks languished as ‘zombie’ banks, perpetually undercapitalized and had their lending ability impaired post-bubble. Sound familiar?

The Japanese government tried many stimulus plans similar to what the current Obama administration is doing. Japan embarked on rampant ‘pump priming’ spending, mainly building bridges and other construbtion projects, aimed at boosting demand. The result: a debt/GDP ratio among the highest of developed nations at 180% without a meaningful recovery. Obama’s stimulus plans mirrors the Japanese errors. We too are ramping up public debt to fuel wasteful projects. It’s estimated that our debt/GDP ratio will be at least 120% before this mess is over with.

Both Japan and America have the highest corporate taxes in the world, which stand just shy of 40% (when you factor in state corporate taxes as well). This will help stunt recovery, as some businesses move out of the country to stay competitive.

To combat its rising debt/GDP, Japan was forced to raise taxes in the mid 90’s to bring down the budget deficit. The Obama administration has stated it plans on doing the same. The Obama plan is to raise taxes on individuals making $250k+ or more a year (many of which are small business owners), as well as raising capital gains taxes. While these tax increases may be politically popular, they still have the same deleterious economic effects as well as further pushing capital out of America.

Both America and Japan had epic asset bubbles, followed by a banking disaster, and inept government policy that wasted taxpayer money, raised taxes, and drastically inflated the country’s debt/GDP ratio. We already have seen what effect this had on Japanese equity prices over time. Long-run, there’s a good chance we may see Dow 4000 someday.


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