Trillions that stimulated the Japanese economy may give us a glimpse of our economic future! Bank of Japan fought deflation without igniting inflation when pumping oceans of yen into the economy. And through it all, Japan delivered a high standard of living to a stable society. It could be a new economic model for mature economies.

What caused Japan’s economic crisis?
How did Japan get past the lost decade?

In Japan, an inflationary bubble in real estate and stock market values crashed just before the 1990s. That began a lost decade of recession, stagnation, falling prices and stock market bouncing near record lows. 

The Bank of Japan took trillions of bad debt off the books of domestic banks in 1997 and 1998. Then in 2001 and again in 2006 massive Bank of Japan liquidity injections, fundamental government policy changes and clever debt management may combine into as a new economic model. 

This lesson 6 of the Investors, The FED and Central Banks Banks course 145 gives detailed answers to the questions, what caused Japan’s economic crisis and how did Japan get past the lost decade? Links at the end of this lesson will guide you to related lessons to learn more.

What you learn:

This lesson teaches that the wide use of Quantitative Easing (QE) by central banks, began in Japan. It covers the backstory needed to understand this radical new central bank tool. First the Japanese used massive infrastructure spending but eventually QE to stop depression. While creating political challenges, QE produced no inflation. As a result, we may be seeing a new model for economies with mature populations. 

Some historical context

For a quarter century, Japanese leaders refused to consider using economic stimulus. Their default position was to blame others for any Japanese economic problem. Blaming foreigners have always been the favorite targets of such complaints. Japanese leaders freely criticize the policies and actions of trading partners and foreign governments while never accepting criticism of any outsiders. They never looked in the economic mirror.

This has always struck me as cultural. As someone who has done business with Japanese firms this thinking has a familiar ring. In my view it reflects common thinking of Japanese management and leadership. Not universal but it is common to encounter the attitude that foreigners cause problems. It strikes me as part of the culture to consider actions or policies of others as the cause of problems for Japan.

Japan's massive infrastructure build

With little or no economic growth Japan used massive borrowing to fund developments and operations. That borrow and spend strategy continued for over two decades. It was called a terrible economic plan that did not work. Stalled economic growth remained stalled.

Infrastructure spending inflated the debt balloon past ¥1,000 trillion! In U.S. dollars that is well above $10 trillion! The debt reached twice the size of the entire Japanese economy! That is one huge mortgage! And a world record no nation wants!

Besides the incredible amount of debt, for decades now, Japan remained in what has been called a low growth economic mire. The financial and economic state stalled. The economy moved sideways while time ticked on. The population aged and the birth rate fell.

With a falling birth rate there were few Japanese babies and population growth reversed to become a rapid decline! Something had to give. Or a great economic and social disaster was predicted for Japan's future.

Japan 1st using Quantitative Easing

Advised by economist Richard Werner, who named it, Japan became the first to use a version of Quantitative Easing (QE) in the 1990s. Then, creative minds at the Bank of Japan put their own spin on this new economic tool. They applied QE to counter the huge deflationary wave triggered by the real estate crash.

At that time, collapsing real estate prices turned loose powerful deflationary pressures. That threatened to collapse prices across the board in an economic disaster. The QE response countered deflation with inflation. Or at least that was the thinking at the time. The invention of QE monetary expansion was a clever and imaginative policy that worked to stall deflation and stabilize prices. But without inflation.

To pull it off QE, the Bank of Japan pumped billions of Yen into the economy. Economists everywhere recognized the success of how they avoided a deflationary collapse. That was an economic milestone. Now all central banks recognize and endorse QE as a new economic tool.

And they use it! The U.S. Federal Reserve, the Bank of England and the European Central Bank have all used QE. It became the standard response to the 2008 financial crisis. At that time each central bank modified it for their situation. All reported varying amount of stimulation success. Except for introducing inflation. It did not do that.

Although the Japanese were first to use QE they did not use it following the 2008 crisis. It took a change in government for Japan to apply QE in the 2008 aftermath. 

Stimulus stirs interest

As Japan had stayed the course with no stimulation following the 2008 financial crisis, the sluggish economy remained tired and stagnate. However, after years of no progress Japanese voters decided it was time for change. They voted to accept a new stimulus program to move their stalled economy forward.

A new government was voted in at the end of 2012. Most importantly, the new government dusted off the printing presses to began producing yen. Although Japan arrived late to the global stimulus party, the newest party host produced an ocean of stimulating yen.

That stimulation grew to become trillions. So a trillions stimulated Japanese economy attracted an immense wave of new capital that poured into the economy. This wave of investing capital attracted outside capital as well. The stock market and economy showed positive signs.

That mass of new capital produced results. Both the economy and investor interest grew as the economic engine showed life. A once sleepy Nikkei index of the biggest 225 Tokyo Stock Exchange stocks, came alive.

Stimulus creates a political dilemma

The Japanese Yen for stimulus trillions produced results but not all was positive. That stimulus got things moving but raised fears that it would bring inflation. Especially in a land of savers, the eroding effects of inflation were unwelcome.

That was very bad news in Japan. Their large aging population would not tolerate any significant erosion of savings. Inflation threatened the accumulations of lifetimes of hard work. In a low interest economic environment those savings already produced no real return.

Although there was no return, at least saved money held value. That changed when inflation threatened to put an unwelcome leak in the value pool. The nation of savers howled in protest. Like politicians everywhere, Japanese politicians wanted to get reelected, so they listened. The government responded with another clever economic invention, NISA.

A deep savings pool called NISA

The innovative Japanese produced another clever financial and economic creation. The Nippon Individual Savings Account (NISA) is a tax-free equity savings vehicle for Japanese citizens. It became available in January 2014. Although unique to Japan, NISA is somewhat like Canada’s RRSPs, TFSAs and America’s 401Ks.

In contrast to most North Americans, the Japanese are huge savers. The national capital pool exceeds a value of ¥8 trillion! That capital horde totals more than twice the entire Japanese equity market! Imagine putting that economic power to work!

But the Japanese do not have an investing culture. Few individual Japanese citizens are stock market investors. In what had been a stagnant low interest economy savings produced almost no return! Now NISA enticed Japanese savers to make their money work in investments. Those that do get to enjoy tax-free returns. Putting a huge pool of idle capital to work adds massive amounts of economic stimulus.

The exchange rate is about 110 Yen to a U.S. dollar or about 85 to a Canadian dollar in early 2020. When talking trillions, Japanese savers hold a serious horde of financial strength. If deployed well it could transform Japan. Perhaps the Japanese will teach us another economic lesson!

Everybody wins!

NISA may put an idle ocean of money to work especially if Japanese savers accept that they must put the money to work or suffer inflationary losses. By becoming investors they can seek returns on saved capital. In that way they can profit and grow in wealth rather than let inflation eat their wealth. That is a very big if.

That means making a cultural change in a mature population. Could that be a bridge too far? Time will tell if such a fundamental change can happen. Applying the huge NISA capital pool could add significant power to Japanese economic growth. Growth could come without printing any new money. Stimulus without printing more money sounds perfect for both the nation and individuals! It lets political leaders promise that everybody can win! Brilliant! Let's hope they make it happen.

Economic challenges continue for Japan

When looking at central bank actions, the Bank of Japan stands out for independent thinking and doing things the Japanese way. They have no end of critics linting the economic wrongs of Japan. Most such lists can be reduced the four points that Japan has: 

• Growth under 2% is too slow

• Huge fiscal deficits are more than 2 times GDP

• Near zero inflation

• Shrinking population

• 1.4 fertility rate (replacement needs 2.1)

• Near zero immigration

Those factors and related complications show as a shrinking workforce for Japan as the population ages beyond their working years. Another effect of an aging population shows as increasing elderly healthcare needs. Such increasing needs, supported by ever fewer workers, means unaffordable healthcare, higher taxes or even greater deficits! 

Those facts seem to spell doom and gloom for Japan’s economic outlook. As well, Japan has significant social challenges and the justice system needs serious reform. Their hidebound corporate culture certainly stalls progress. But does Japan know something we do not?

Another way to look at Japan

Japan may be showing us that population stability or even decline may mean the end of economic expansion but not loss of a high quality of life. After the crisis, Japan does have slower growth than other advanced countries. Yet, when it comes to how people are doing, Japan retains a good record! In Japan, GDP per person equals the U.S. performance, and continues to beat many other economically advanced countries! 

And Japan does something the U.S. has not done, deliver the benefits of their economic performance to most citizens. That happens without the massive and growing inequality between rich and poor, all too common in the U.S. As well, throughout these years of change, Japan continued to show low unemployment and without any spike in crime.

All that, while Japan continues as the third largest economy in the world. Plus it has booming tourism and a universally shared, high standard of living. In addition, Japan has excellent infrastructure and an extensive and sophisticated transportation network connecting many beautiful, well-maintained cities. Japan delivers prosperity to its citizens.

Japan has not been sitting still. They lead the world in technologies to serve the needs of the elderly. As well, Japan is a leader in robotics to provide goods and service production. Producing robots to produce more with fewer workers seems a natural, made in Japan solution! 

Made in Japan debt solution

Yes, but what about that massive Japanese Government debt? The debt is denominated in yen. That may be a key point and what makes up that debt. 

Government of Japan debt: 

Government borrowing %5

Financing Bills 7%

Government Bonds 88%

Owners of Government of Japan debt:

    Bank of Japan 46% (this is the central bank)

    Domestic Life Insurance Companies 20%

    Domestic Banks & Security Firms 17%

So almost half the debt (46%), borrower and lender are both the Government of Japan. The massive debt liability gets endless media attention but that offsetting asset ownership gets no media attention. 

Most of anouther 45% of the debt is held by Japanese financial firms. That puts about 90% of Japan’s bonds in domestic hands. That is part of Japan being the world’s biggest creditor nation. 

No nation in the history of the world has defaulted on debt denominated it its own currency. Japan will certainly not be the first. That debt can be paid by issuing yen. They can print a solution.

Japan does not have a debt problem:

There are three reasons that Japan does not have a debt problem:

• Japan issues debt in its own currency

• Japan has a flexible exchange rate

• Japan controls its central bank

Japan will do it the Japanese way

It could be that the Japanese are showing the world the makings of a new economic model for a mature economy. Japan will always do life and all parts of it the Japanese way. In the case of the economy that Japanese thinking may have opened the door to a new economic model.

Japanese thinking seems to apply to how the the massive national debt was created and managed. In a new developing economic age, Japan will certainly continue using the Japanese way to develop their sophisticated society and economy.

As home to the philosophy continuous improvement in business, production and life, Japan, uses consensus building to quietly laying the foundation for change with all affected. That thinking and behavior is quite the opposite of the aggressive, “get ‘er done” mindset of many western cultures. 

In Japan, age and time served with loyalty are promoted and respected over performance or competence. There seems to be no concept of getting the right person for the right job. New talent or ideas can be a tough sell. 

Such thinking and behavior are a challenge to western thinking. My frugal approach and cheap mindset has always been amazed at how perfectly good, slightly used products are cast off by Japanese to always be replaced by new products. Seemingly normal thinking in Japan.

Should investors buy Japanese stocks?

Japan and Japanese people rank high in my mind and have been great to do business with. But when it comes to investing I have always given Japan a pass. That sophisticated, advanced society and leading economic force presents challenges. Japan is for the Japanese and not foreigners.

This rich, sophisticated, educated land has a strong deep ingrained culture. They prize their land, environment and Japanese way. There is a long history of putting all troubles and problems on others. Foreigners receive the blame for all manner of forces, failures and faults. It will be a tall order to see that change.

Japanese growth stalled decades ago. With stimulus this is changing. But is it sustainable? Demographics of their aging population works against economic growth. For an investor, any upside potential always seemed unlikely or very limited. I will stay tuned but for the time being my capital will not be invested in Japan.

Questions Answered!

The lesson answered the questions, what caused Japan’s economic crisis and how did Japan get past the lost decade? It explained the inflationary bubble in real estate and stock market values that crashed just before the 1990s began a lost decade. Later QE with fundamental government policy changes and debt management may be showing us a new model for economies with mature populations. 

Lesson takeaways,
Trillions that stimulate the Japanese economy show our economic future!

The effect of trillions that stimulated the Japanese economy may give us a glimpse of our economic future! When the Bank of Japan pumped oceans of yen into the economy to fight deflation and avoid depression, no inflation happened. And through it all, Japan delivered a high standard of living to a stable society.

• Japanese Yen for stimulus trillions turned loose an economic force.
• Japan was the first to use Quantitative Easing.
• Stimulus produced deflation fighting results without inflation.
• NISA may add private capital to economic stimulation
• Japanese always do things the Japanese way
• Japanese investments have limited outside appeal
• Japan may have shown a new mature economy economic model

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Investors, The FED And Central Banks, lesson links:

Central bank creation and role explained Lesson 1

FED billions bounced depression Lesson 2

FED begins Quantitative Tightening Lesson 3

FED market direction signals Lesson 4

Most powerful civil servant Lesson 5

Trillions that stimulate the Japanese economy Lesson 6

Central Banks of Canada, UK and Europe Lesson 7

Central bank lid and base setting Lesson 8

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Movers & Shakers Of Stock Markets

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