How Japan has fared in 30 years since the stock market

bubble burst

Nostalgia for the good times has been a coping mechanism for the world’s third
largest economy.

On 29 December 1989, Japan’s Nikkei stock market index hit a high of 38,916, a
milestone that proved to be the last hurrah of the country’s asset-inflated bubble
economy – a period of ostentatious consumption and overconfidence in the
infallibility of Japan, Inc.

What followed was a spectacular

fall from the heights of the mid-
to late 1980s. The stock market
plummeted, losing more than
$2tn (£1.5tn) in value by
December 1990. In the years that
followed, the Japanese surveyed
an alien landscape of
“restructuring” – code for cost-
cutting – deflation and
stagnation. When the bubble
party ended, its hosts appeared to have no idea how to clean up the mess left by
absurdly high share and property prices.

Occasional outbreaks of nostalgia for the excesses of the boom years, when the
ground beneath the imperial palace was said to be worth more than the entire state of
California, have become a coping mechanism for a country now facing a new set of
economic problems.

“Japan’s 1980s bubble was the bursting start of a long adaption from a young, fast-
growing economy to an ageing, slow-growth new normal,” says Martin Schulz, senior
economist at the Fujitsu Research Institute.

“It took until 2002 to bail out the banks from the real estate adjustment. It took
another 10 years to put the necessary supply-side and social security reforms in place.
The benign impact of the global financial crisis has shown that Japan’s economy has
fully adjusted to its ‘new normal’ of slow but solid long-term growth.”

Schulz adds that the economic policies of the current prime minister, Shinzo Abe,
have done some good for a nation that remains a global powerhouse as the world’s
third-largest economy.

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InThinking www.thinkib.net/Economics 1
“Abenomics is working to get innovation going again and to improve future
expectations. Japan is now much better integrated in Asia with its long-term growth
prospects. Its service economy is
flourishing again and embraces
digitalisation, people find jobs well
into retirement, and the young
generation is optimistic. What’s
missing are better work-life balances
to enable families to have children
again, and a more proactive stance to
deal with the long-term debt
overhang.”

The end of the bubble era coincided

with the enthronement of a new
emperor. While Akihito sought to
bring the imperial family closer to
ordinary people, much of his three
decades on the Chrysanthemum
throne, which ended with his abdication this April, was marked by policy drift and a
creeping fear that Japan’s post-bubble woes were merely the precursor to long-term
decline.

Enter Abe, hawkish on defence and conservative on social issues, but wedded to
Keynesian notions of the state as a benign spending force for economic good. “Japan
is back,” he declared when he became prime minister for the second time in late 2012.

It wasn’t long before optimism over Abenomics, at home and abroad, began to chip
away at the “lost decades” narrative that followed the bubble era. The first two of
Abe’s “three arrows” – fiscal stimulus in the form of infrastructure spending, and
loose monetary policy from the Bank of Japan, in the form of 0% interest rates and
buying bonds off financial inistitutions in a process known as quantitative easing –
had the desired effect. The Nikkei began to rise – though, at about 24,000 points, it is
currently far from the levels of 30 years ago – and export-dependent manufacturers
cheered a weaker yen.

But after seven years of Abe, who recently became Japan’s longest-serving prime
minister, a more mixed picture is emerging. There are more jobs than people to fill
them and record numbers of tourists, mainly from other parts of Asia, are bringing a
glimmer of hope to depopulated regions.

But there have been policy failures that highlight the perils of vowing to nudge Japan
out of its deflationary, low-growth orbit.

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InThinking www.thinkib.net/Economics 2
Abe’s attempt to achieve 2% inflation came up short – the CPI rate is running at 0.5%
– and questions persist over corporate governance in the wake of the allegations
against the former Nissan chairman Carlos Ghosn.

Growth in the Japanese economy was 0.4% in the third quarter of this year. But there
are fears that soft global demand and the US-China trade war will hit exports.

There is concern, too, that a recent rise in the consumption (sales) tax, from 8% to
10%, to address Japan’s public debt burden – the highest in the industrial world and
more than twice the size of its $5tn economy – will weaken private consumption.

Japanese economy posts longest expansion in more than a

decade

Abe’s first two arrows are still in flight, with the government announcing a record
budget this month that its architect hopes will buy his economic project time and win
him support after a series of damaging political scandals.

It includes 13.2tn yen ($121bn) in public spending on disaster reconstruction,

infrastructure and scientific research designed to shield the economy from a possible
slowdown caused by a US-Japan trade war and a post-2020 Olympic hangover.

But critics say the third and most critical part of his programme, structural reform,
looks more like a badly thrown dart than an arrow, despite grim warnings about the
failure to address the effects on long-term growth of a super-ageing, declining
population.

Abe has encouraged more women to enter the workforce and relaxed immigration
laws to allow a modest number of blue-collar workers to fill gaps in pressurised
sectors of the economy. But much needed reform of the labour market, corporate
governance and healthcare have been slow to materialise.

“Monetary easing and fiscal stimulus were supposed to make room for structural
reform,” says Koichi Nakano, a politics professor at Sophia University in Tokyo. “But
structural reform hasn’t happened. This means the Japanese economy continues to
depend on government steroids. God knows what will happen after the Olympics.

“Abe’s economic policy gave him enough political capital to push through much of
his rightwing agenda – like the state secrets law and security legislation – but the
government can’t continue to pump money into the economy, and the Bank of Japan
can’t continue to subsidise Japan, Inc. It is telling that he never achieved his inflation
target. The fundamental weaknesses of the Japanese economy have never been
properly addressed.”

© Mark Johnson,
InThinking www.thinkib.net/Economics 3