Japan’s decade of decline

Japan is mired in a decade of decline. The Japanese economy is snarled in stagnation. It has been in the doldrums since the early 1990s. It still has not rebounded. For the past ten years leading on up to the present, Japan has continued to exhibit severe weaknesses in its overall macro economy. All of Japan’s major economic indicators remain dismal. Gross Domestic Product Growth is anemic. The inflation rate is much too weak. The unemployment rate has nearly doubled. The Japanese stock market has never fully recovered from its 1989 peak. Japan has lost its global banking dominance. By nearly every objective economic standard available, Japan can truly be said to be immersed in a decade of protracted economic decline, with no imminent turn-around in sight.

Although some pundits may still remain skeptical, the facts are clearly indisputable. Japan is mired in a protracted economic recession, plagued by weak Gross Domestic Product growth. In the third and fourth quarters of 1999, Japan suffered two consecutive quarters of declining GDP growth: down 1 percent in the third quarter and 1.4 percent in the fourth quarter–officially marking yet another economic recession.
In addition to flagrant declines in GDP growth, Japan is still further plagued by the problem of disinflation, which signal further economic weakness. For although low inflation is generally desirable, in classic economics, a persistent pattern of weak prices tends to highlight a rather weak economy with subdued demand and very little market vitality.

Of particular concern to the Japanese is the depressed real estate sector, which sharply depreciated in each of the past nine years. General Japanese property values fell 4.6% in 1998 and 4.9% in 1999, while commercial land prices fell by an even wider margin: by fully 8.1 percent in 1998 and 8 percent in 1999.
Japan’s increasing national unemployment rate is of dire concern as well. In the late 1980s to the early 1990s, Japan enjoyed the lowest unemployment rate in the world, in the two percent range–a rate substantially lower than that of the United States and virtually every industrialized country in the world at the time. Yet, today, Japan’s unemployment rate has nearly doubled from its “bubble” two percent low. The rate is now as high as 4.5%–a new postwar high. Indeed, for the first time in decades, the United States now enjoys a lower unemployment rate than that of Japan (3.9%)–a remarkable feat, considering Japan’s former heyday practice of lifetime employment.

In addition to the traditional economic indicators of GDP growth, inflation and unemployment, a nation may also gauge its economic vitality through the health of its capital or equity markets–i.e., by its stock market. In the case of Japan, this can easily be ascertained by merely looking to its major stock market benchmark: namely, the Nikkei blue chip index, Japan’s version of the U.S. Dow Jones Industrial Average. In this area, Japan has suffered yet another devastating economic blow: From a market peak of nearly 40,000 in 1989, the Nikkei Index has since been cut in half, languishing at around 20,000 or less for nearly a decade. The U.S. equity markets, by sharp contrast, are still booming, despite some volatility.

Given the pronounced weaknesses in Japan’s macro economic fundamentals, it is no surprise, then, that many major Japanese corporations (“Japan Inc.”) should be reeling from the fallout. Indeed, particularly hard hit is the once dominant Japanese banking sector, which is mostly insolvent and still struggling to survive in an extremely low interest rate, bad loan, low consumer confidence environment.

To put it bluntly, Japan has completely lost its global banking/financial dominance. In 1997, for example, Yamaichi Securities, one of Japan’s largest brokers, arguably Japan’s version of Merill Lynch, went bankrupt.

As Japan lost its global banking dominance, American banks began to rise in their place. Seven of the ten largest banks in the world are no longer Japanese owned, as was the case back in 1991. As mutual fund manager Christopher Davis candidly declared in a recent Investment News interview: “Investment banking is a global growth business dominated by a small American oligopoly.” These American financial giants include such venerable companies as Morgan Stanley, Goldman Sachs, and Citigroup. “It’s also notable,” says Davis, “that during the financial crisis in Asia customers in Japan lined up around the block to put their money into Citibank branches.”

People of the CNMI: Don’t expect a Japanese economic turnaround any time soon.