Is the Japanese Economy Finally Recovering from the Lost Decades?

  When it comes to the Japanese economy, the labels that most people think of are “lost thirty years”, “low desire society”, and “deflation”. Moreover, whenever domestic experts mention the Japanese economy, they regard it as a background board and an object of warning. Whether it is a real estate bubble or a recession in the balance sheet, they will use the Japanese economy as the object of criticism.
  Inadvertently, the Japanese economy and the Japanese stock market were stunned. In the second quarter of 2023, the quarter-on-quarter annualized rate of Japan’s GDP (the same below) is as high as 6%, which greatly exceeds market expectations. The Japanese stock market will rise by as much as 22% in 2023 and hit a record high. It is indeed a barometer of the economy.
  European and American economies like to measure economic growth by month-on-month. This data is usually more volatile than the year-on-year period. Is the stunning data of the Japanese economy just a flash in the pan? It took a little longer. Japan’s GDP grew by 3.7% in the first quarter, and Japan’s GDP grew by an average of 2.8% in the past five quarters.
  At first glance, the average growth rate of less than 3% does not seem to be very good. However, we must know that the average growth rate of the Japanese economy in the past ten years has been less than 1%, and the growth rate of about 3% is very impressive in the developed economies of Europe and the United States. Why has the Japanese economy suddenly been amazed recently?
Both house prices and inflation have risen

  Japan’s strong economic growth in the second quarter was largely due to a surge in net exports. Didn’t it mean that the global economy is slowing down? Why is Japan’s exports bucking the trend? The continued sharp depreciation of the yen may have played an important role in enhancing the global competitiveness of Japanese products.
  In the past two years, Europe and the United States have had to raise interest rates sharply in order to combat high inflation, but the inflation environment in Japan is much better. The Bank of Japan has maintained zero interest rates, causing the yen to depreciate sharply. Since 2021, the dollar has depreciated against the yen from around 100 to the current 145, and the yen has depreciated by more than 40%. In 2021 and 2022, Japan’s export growth rate will be as high as 21.5% and 18.2%, respectively.
  The short-term economy often has fluctuations, and sometimes the performance of 1-2 years cannot explain too many problems. We might as well look at whether the labels that were previously attached to the Japanese economy have changed.

  The first label is “Thirty Lost Decades”. The Japanese economy reached the peak of its economic boom in the late 1980s, and then, like a young man who had stumbled, lost his way and fell into ultra-low growth. One of the most important reasons for the “lost thirty years” is the bursting of the Japanese real estate bubble, which triggered a series of negative economic feedbacks.
  Japanese housing prices have continued to fall for more than 20 years. After the launch of “Abenomics”, Japanese housing prices finally bottomed out around 2014. From 2014 to 2019, Japan’s comprehensive housing prices rebounded by 20% from the bottom. After the epidemic, the rise in housing prices has accelerated. From 2020 to 2022, it will rise by about 25% in three years. Japanese real estate has entered an upward cycle for nearly 10 years, and has long since gotten rid of the continuous decline after the previous bubble burst.
  Japan’s low borrowing costs have attracted a large amount of foreign capital into real estate. For example, the world’s largest investment management company, the Blackstone Group of the United States, has been buying Japanese real estate strongly since 2020.
  Another label is “deflation”. When people mention deflation, they first think of Japan. Negative interest rates are also a strange product of Japan. Even though Japan has implemented an extremely loose monetary policy for a long time, the situation of deflation has not changed. Deflation will make people more willing to hold cash rather than invest and consume, because as prices continue to fall, holding cash is equivalent to increasing purchasing power in disguise.
  In the 30 years from 1992 to 2021, the average annual growth rate of Japan’s CPI was only 0.27%, and in 1999-2005 and 2009-2011, CPI continued to show negative growth. However, this era of persistently low inflation, and even deflation, appears to be passing. In 2022, Japan’s CPI will grow by 2.5% year-on-year, finally returning to a relatively normal price level. It is generally believed that the desirable inflation level in developed economies is 2%.
  From the monthly data, since August 2022, Japan’s CPI year-on-year growth rate has been above 3% for 12 consecutive months, which is unique in the past 30 years. The hat of deflation has also been removed from the head of the Japanese economy.
  What’s more, the wages of Japanese workers have increased recently. Japanese wages have been rock-solid for the past 30 years. According to data from the Organization for Economic Cooperation and Development (OECD), the average annual salary in Japan will be US$39,711 in 2021, an increase of less than US$2,000 from US$37,866 in 1991. With the continuous downturn of the economy, enterprises can only cut back on food and clothing, and naturally have no ability to raise wages for employees; conversely, if employees’ wages do not rise all year round, they will be even less able to increase consumption, resulting in low desire, and it will be difficult for the economy to improve. vibration. This kind of vicious circle, the Japanese government tried its best to break it.

  Perhaps the Japanese economy is gradually coming out of the haze of the “lost thirty years”.

  This vicious cycle seems to be broken recently, and rising inflation is the key to breaking this deadlock. Japanese labor unions waged a fierce “struggle” for wage increases in the spring labor negotiations, and achieved initial results with the solidarity of the government. According to the results of wage negotiations between large Japanese companies and labor unions announced by the Japan Keidanren Federation in May, large Japanese companies will raise salaries for their employees by 3.91% in the spring of 2023, the highest level in nearly 30 years.

Enterprises and residents are increasing leverage

  After Japan’s real estate bubble burst, the biggest trauma was the damage to the balance sheets of enterprises and residents. Both sectors have experienced more than 20 years of deleveraging to repair their balance sheets. This is Japan’s “lost 30 years” the most important reason. During this period, the Japanese government had to continue to increase leverage, but it could not change the long-term sluggish state of the Japanese economy.
  The situation turned around after 2016, when Japanese companies and residents began to increase leverage, especially after 2018, the increase in leverage has accelerated significantly. According to data from the Bank for International Settlements (BIS), Japan’s non-financial sector’s credit-to-GDP ratio continued to rise rapidly from 95.1% at the beginning of 2018 to 116.1% at the end of 2020; the Japanese resident sector’s credit-to-GDP ratio rose from 60.4% to 67.5%.
  Perhaps the Japanese economy is gradually coming out of the haze of “lost thirty years”, which also brings some enlightenment:
  First, the collapse of the real estate market is likely to trigger long-term deleveraging of enterprises and residents, that is, a balance sheet recession. It took more than 20 years to digest this negative impact.
  Second, managing deflation is much more difficult than managing inflation. In the traditional frame of economic thinking, people worry more about inflation. However, judging from the experience of managing high inflation in Europe and the United States in recent years, as long as the central bank decisively tightens the currency, inflation can be easily controlled; Both show that fighting deflation is much more difficult.
  Third, the series of extremely loose macro policies launched by “Abenomics” have indeed played a positive role in the recovery of the Japanese economy. It has brought about the recovery of the Japanese real estate market, making companies and residents start to increase leverage again. Easier monetary policy does not appear to have many side effects without triggering high inflation.
  Fourth, after a long time, you will always come out. Real estate is a permanent industry. After the bubble goes away, it will always rise again. After a long period of repairs, the balance sheets of enterprises and residents will eventually return to increased leverage. The only difference is how long this fix takes. If there is no correct policy support (such as Japan), the recovery time may be as long as 20 years; if there is better policy support (such as the United States after 2008), the recovery time may only be 4-5 years.

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