I have had this question for a while.... Japan's stock market had a huge "bubble" and has been in a 20+ year bear since popping. Haven't they had "easy money" for quite a long time? What caused their "bubble" and what made it pop? Could someone give a timeline of events related to the chart below? I wasn't trading back then. What are the similarities and differences between Japan's case study and the current policies the US has? Could the US expect a similar outcome like Japan has had due to easy money? Thoughts and opinions ? Thanks
It's complicated... If you really want to get into the history of the Japanese economy properly, read "Princes of the Yen" by Richard Werner.
I don't have a complete understanding of the lead-up - but from what I do know, you had a fundamental story of years of miraculously high paper GDP growth, worldwide commercial success of major Japanese companies appearing from nothing in 15-20 years, and a conviction that Japan had a comprehensively superior 'system' to typical Western capitalist economies. As in all major bubbles, fractionally-reserved credit expansion enabled the thing to grow as far as it did. One presumes that Japan had little cultural memory of major financial bubbles and obviously the attitudes towards debt and speculation were far different to today's. The aftermath (in terms of asset price declines, and lack of a subsequent rebound) was so severe and long lasting for several reasons. Not only did you have extremely high bubble valuations to start with, but the bust exposed massive, previously-unrecognized structural problems with the Japanese economy and business structure/culture. "Zombie companies" are an example, another would be large conglomerates owning a wide array of businesses, some profitable and some not, using the profits from the successful concerns to keep the failures going - thereby squandering profits while also maintaining an inefficient allocation of resources. As a result, not only were prices ridiculous based on a sober estimate of long-term trend growth, but even "sober" estimates of trend growth turned out to be vast over-estimates. The other change was psychological, related in part to demography. Attitudes towards investment, speculation, and borrowing did a complete 180, a current which only grows stronger with each passing year as the population ages. The elderly aren't borrowing to speculate on property or undertake new business ventures, they're stashing savings under the mattress or in JGBs. As a consequence you see persistent CPI deflation and weak money supply growth, which pressures nominal valuations of stocks and other assets. Comparing to the US, I would say: the USA's problem is that we have a healthy and functional capital-allocation system (though it's becoming less so as time goes on) which is being given false price signals as a result of Fed policy and the fractional-reserve credit system. Therefore, if the system were to be reformed (or even, if monetary policy were to become less extreme) the malinvestments would be quickly worked off and normal growth would resume. Japan however remains saddled with a broken and dysfunctional capital-allocation system, plus a cultural and demographic backdrop which makes it extremely difficult to engender even "feel good" speculative booms. Ultimately I think whatever the specific course of events, the USA's experience is unlikely to be similar to Japan. Almost all the relevant fundamental factors (structural economic features, culture and demography) are very different in the two countries. Low administered interest rates still depend on people to borrow and spend the money, along with opportunities for at least plausibly productive investment/speculation; if you don't have either then you get a situation like Japan's today. If I had to hazard a guess, I'd say the USA will stay in the going-nowhere boom-bust rut we've been stuck in since 2000, eventually culminating in a crisis of moderate severity (sort of like a 2008 which leads to major industrial restructuring, monetary reform, and long-term behavioral changes in the manager/director/shareholder class) followed by a renewed period of steady growth, while 'Abenomics' will fail and Japan will eventually face a crisis of a much more existential nature.
Good points Specterx, thanks for your input. I'm a chart guy , I failed economics in Highschool. The closest thing that looks to resemble that bubble from Japan seems to be the Nazdaq tech boom and bust or US market 1920-1950 Tres Knippa has a website shortjapandebt.com that has some interesting points on it about the Japan situation. I don't know for sure but I thought I heard him say somewhere that there is the potential for usd/jpy to hit 1000 if things really go belly up. That would be nuts.