Today’s Japanese Lesson – BABURU KEIZAI

Posted on February 9, 2014


There’s another story behind the glitter of our mass media economic reporting.   The Japanese have ‘been there, done that’.

I thought the title, ‘Baburu Keizai’ might be intriguing enough to get you to read the post to find out the meaning.  You probably already suspect that it is a  Japanese phrase.  Well, this phrase, and the history behind it, should tell us a lot about the shape of things to come here in America.  The phrase translates to ‘Bubble Economy’.  The history behind the phrase goes back just a short 24 years to 1990.  1990 was the year of the most epic financial meltdown in Japan in modern history.  ‘Baburu Keizai’ is thought to have originated, or at least brought into popular economic parlance by Yasushi Mieno, the 26th governor of Japan’s Central Bank, the Bank of Japan

Leading up to January 1990, Japan had been witnessing a meteoric  rise in values, not only in the securities markets, but in real estate and the rest of the economy in general.  Our Fed Reserve has an expression you sometimes hear, “the economy is ‘overheated’”.  At that time, it was said, and maybe it was a little hyperbolic, that a square inch of land in the fashionable Ginza district of Tokyo cost more than all the real estate in a square mile of good land in the U.S.  The Nikkei 225 Average had shot up to nearly 39,000.  Barkley Rosser noted that in 1990 the aggregate value of all land in Japan was fifty percent greater than the value of all land in the rest of the world.  In the five years before its 1989 peak, the Nikkei stock average rose 275%.  Property values exploded to the extent that the small tract of land surrounding the Imperial Palace in Tokyo was at one point said to be worth more than the entire state of California.  The house that former Prime Minister Kiichi Miyazawa occupied (provided him by his political contributors), was merely a sixth of an acre.  It’s market value was estimated at 2.7 Billion Yen, or approximately $22 million U.S. dollars! 

On balance, it should be noted that not all of the conditions prior to the bust period in 1990 were accountable to speculation or ‘irrational exuberance’.   In 1985,  the Plaza Accord was signed between 4 major world currency players –  (the UK, France, West Germany and Japan) to intervene in the currency markets with the intent to depreciate USD against JPY and the West German Deutschemark (DEM).  The unexpected result, among others, was the sharp appreciation of JPY from around USD/JPY 200 in 1985 to around 135 in 1990, which harmed the competitiveness of Japan’s exports – thus triggering a cratering and subsequent stagnation of GDP for a long period.

At the time some economists including Mieno, were concerned about roreika – the graying of the Japanese population demographically, combined with a historically low birth rate below replacement level.  In Governor Mieno’s estimation things were headed for a collision course.  Mieno decided to deal with it pro-actively by raising interest rates by just a small increment. The intended effect was similar to turning the gas burner on the stove down a quarter of a turn, to bring the boil down to a simmer.

Unfortunately, the reaction to this exceeded Mieno’s worst expectations.  The Nikkei tumbles 50 percent  within 2 years and the effects resonate and drag Japan into what economists term, “the Lost Decade”.  In reality though, the ‘lost decade’ has lingered well beyond a decade.  As things stand today, the Nikkei has not even recovered half of it’s value prior to the events of 1990.  Right now, early February 2014, the Nikkei is just under 14,500.  Ah, but you might remark that there have been intermittent rallies since the 1990 crash.  There have been indeed.  As Martin Weiss, writing in Money and Markets notes:

Between 1995 and 1996, for example, the Nikkei Index rallied for 13 months, gaining 59.4 percent from its lows and recovering a full third of its early-1990s decline.  Between 1998 and early 2000, it did even better.  Its rally lasted 18 months, and the average rose 63.7 percent, recouping 37 percent of its prior decline since 1990.  The biggest rally of all began in 2003. The Nikkei rose by a whopping 136 percent, from a low of 7,700 to a high of 18,157 over the course of 51 long, glorious months — only to come crashing down again to brand new lows in the global debt crisis. (By comparison, the Nikkei’s most recent rally, which began in 2012, is not nearly as impressive.)

All of these rallies coincided with re-inflations of asset bubbles in stocks and real estate.  More significantly, they were all precipitated by infusions of stimulus from the Bank of Japan, coupled with central bank trimming of interest rates down to zero.  Additionally, consumers abandoned savings and spent extravagantly during the ephemeral market rallies.  During these rallies there was  periodic (and short lived) perceived growth in the national GDP and upticks in employment. 

Now, to put a fine point on things, it is necessary to say that some differences exist between the American economy and that of Japan, but the big picture is alarming.  Day after day, we hear a consistent drumbeat from the talking heads ranging from reporters on the economic beat to the mass media, telling us that everything is dandy.  There is no inflation, the job market is getting better by the day, the stock market is rallying and housing is on the rebound.  Our GDP as measured from November of last year to the end of January, is up dramatically.  

It would be wonderful if the Emperor, in this case the ‘Obama Recovery’ actually had clothing.  It doesn’t.  The job reports are fabricated. Youth employment in Japan never came back from the crash of the ’90’s.  Our young people are out of work and many who were full time employed have been dropped to part-time hours.  The number of people that have dropped out of the job search pool is the largest it has been for over 4 decades.  The Labor Force Participation Rate (which is a much more telling and instructive number than U-3 – the one touted in news reports) is currently 63%.  The month Obama took office for his first term, it was 65.8%.   Dave Manuel explains the difference between the gleeful reports of unemployment numbers coming down, when the media recites the ‘U-3’ statistics, and the ‘U-6’ statistic that shows the real unemployment picture:

The “U-6” includes two groups of people that the “U-3” does not:

1. “Marginally attached workers” – people who are not actively looking for work, but who have indicated that they want a job and have looked for work (without success) sometime in the past 12 months. This class also includes “discouraged workers” who have completely given up on finding a job because they feel that they just won’t find one.

2. People who are looking for full-time work but have to settle on a part-time job due to economic reasons. This means that they want full-time work, but can’t find it.

Frankly though, I think you will agree that the Obama Labor Department is probably cooking the unemployment numbers in both categories and a lot of reputable economists who know the inner political workings, think the job numbers are extremely distorted.  Let’s be reasonable here.  If the ostensible number of jobs created to just break even is 200,000 plus per  month and in January the number reported was 113,000, by what contorted logic could the ‘unemployment rate’ drop 1/10 of a percentage point?  But I won’t belabor (pardon the pun) that point – there are a lot of faux economic statistics being reported.  You, being an observant human being, can gauge the reality or non-reality of them yourself.  I’ll just say that if you trust most of the opinion polls that you see popping up supporting this or that political perspective then you’ll be comfortable with the Department of Labor Statistics’ ‘Household Survey’ that these job numbers are based on.  If you’d like to see a more in-depth and expert analysis of the reality as opposed to the fiction of the job reports trumpeted on the news, I recommend you take a look at this outline from NASDAQ.

One thing you hear a lot of is talk about the non-existence of inflation and the one thing you hear almost nothing about is the fierce growth of debt.  Despite the fact that  prices I see on a day to day basis make me extremely skeptical about the low inflation claims, it is a historical fact that inflation by whatever measure lags behind the market rallies and asset bubbles by up to 3 years.  Other similarities between what appears to be the ‘new normal’ here and Japan’s ‘lost decades’ is 18 to 30 somethings living at home with their parents.  The Japanese for whom joblessness was a phenomenon unfamiliar in their society, even stigmatized the youthful unemployed and part time workers as ‘Freeters’, which roughly compares to our term ‘slacker’.  

If our national debt – only one factor of which the Treasury Department reports, seems incredible at over $17Trillion, and concerning which,  Republicans are set to capitulate yet again on a debt ceiling increase – imagine the crisis that will ensue once the Fed lifts the interest rate from zero.  The ‘bulls’ in today’s market are praying that they can time their exit from stocks before that inevitable event occurs, which will trigger the collapse of our own re-inflated asset balloons.  As a follower of the ‘Austrian Model’ of economics, I and my colleagues will owe John Maynard Keynes a posthumous apology if the piper never shows up to be paid. 

The lesson of the Japanese economy for us who are not swayed by the ebullient propaganda from the mass media and the CNBC talkers whistling through the graveyard, is that an economy pushed upward by debt and persistent aggressive stimulus in the place of genuine, broad economic growth, is just another “baburu keizai” looking for a place to self-destruct.