Chapter 8
What the United States Can Learn from Japan’s Lost Decade(s): 1989-2009
I select Japan’s lost decade as relevant to our situation today because Japan experienced both a stock market bubble and real estate bubble that burst not unlike our own. How well I remember a different era when I was working for the large computer manufacturer Amdahl in Silicon Valley that was 40 percent owned by Fujitsu. I studied the Japanese miracle and negotiated business in their stylized format, gaining both respect and seeing some weaknesses in their system. Economists today are asking if the deflation and long-term slow economic growth are paths that the United States might follow. In this chapter, I’ll dig deeper, looking at the economic data in comparison to the United States, and then I’ll wrap up with my interpretation of the similarities and differences that may predict how our particular crisis evolves.
The United States is following an aggressive policy response to our credit crisis, much as Japan did. The Fed cut the main U.S. interest rate to as low as zero in December 2008, and then extended to nonconventional measures in trying to resuscitate the economy with buying debt and making direct loans. These moves were reminiscent of those taken by the Bank of Japan in the early part of this decade, as it struggled to end the deflation gripping that country’s economy. Japan’s economy went from the shining example that the world wanted to emulate in 1989, to very slow growth for almost two decades. After its credit bubble broke when both real estate and the stock market fell in 1990, Japan’s economy never returned to its vibrant success. The period has been called the Lost Decade. The United States is entering a similar situation of a credit bubble bursting.
To revive the economy, Japan went on an intense fiscal-stimulus spending spree, creating big deficits so that its central government debt is now approaching 200 percent of GDP. (By comparison, the United States’ debt is 65 percent.) The Bank of Japan cut its interest rate to zero, just as the United States has done. Then it made extra liquidity available to the market in what is called quantitative easing (QE), just as the U.S. Federal Reserve is now doing.
Japan’s Lost Decades: How Japan’s Economic Bubble Burst after 1989
Figure 8.1 shows how Japan’s stock market soared to 38,000 at the end of 1989—and how it has been dropping since; it is now around 10,000, which is a 75 percent drop. Japan’s real estate bubble did the same. Japan’s bubble burst, and its economy has been slow ever since. Note: The charts in this chapter use the scale of 100 million yen because that’s easy to translate to dollars; there are about 100 yen to the dollar, thus 100 million yen equals $1 million.
The Japanese real estate bubble burst as the direct result of credit expansion and contraction.
Figure 8.2 shows how Japanese land prices peaked at the same time as stocks peaked.
Although there were many factors involved in creating the Japanese economic bubble, dominant were the same sort of inputs that helped create the extreme growth in China from 1980 to now: a cheap currency, giving the country a low-cost wage base for its motivated and reasonably well-educated work force. As the Japanese miracle emerged and the yen strengthened, wages rose in global terms. To extend and even expand the boom, Japan’s accommodating central government partnered with business through the powerful Ministry of International Trade and Industry (MITI) and provided easy and inexpensive credit.
Figure 8.1 Japanese Stocks, from 1970-2009: The Bubble Peaked in 1990
Figure 8.2 Japanese Real Estate Also Peaked in 1990
The Japanese bubble was supported by the expansion of credit way beyond proportion to the real economy. That drove real estate and stock to heights based on projections for unlimited growth.
The expansion of credit induced assets to rise, so watching the credit growth is an indicator because it drove the self-supportive rise in stocks and real estate. Once the debt in Japan hit its limit and no longer grew, as shown in
Figure 8.3, the Japanese economy lost its miraculous growth.
Another way of looking at the data in
Figure 8.3 is to show the annual growth rate, which rose to 18 percent just before it crashed, as shown in
Figure 8.4.
The result of the collapse is best measured in comparison to the U.S. economy by showing the GDP of both on the same graph, as in
Figure 8.5. This is the key chart to remember when thinking about the comparison of the United States to Japan over the lost decades. (Note: The data shown in
Figure 8.5 is not adjusted for inflation or exchange rate; only the nominal published numbers are provided. Adjusting for inflation would show the United States with a little less growth, but it would leave unchanged the key point of the relative sluggishness of Japan over the period. Nominal GDP is a useful base for comparison to other nominal measures within each economy.)
Figure 8.3 The Number of Loans Outstanding by Private Financial Institutions Shows How Japan’s Debt Bubble Burst in 1990
Figure 8.4 Japan’s Loan Growth Collapsed from 18% Annual Growth in 1989 to No Growth
Figure 8.5 Japan’s Economy Was Flat after 1990 Burst
Japan has been unable to return to the growth achieved with expanding credit. Japan excelled in production for export. Japan’s competitive edge of cheap production labor was taken over by other foreign countries. Japan bankrolled many of the Asian Tigers (Thailand, Korea, Taiwan, Philippines, Malaysia, Singapore, etc.) in setting up foreign factories to produce what was uncompetitive at their own high wage rates. China was the biggest replacement for Japan’s manufacturing for the world.
The economic slowing, combined with the strength of the yen, delivered a 20 percent price drop over 23 years—from 1980 to about 2003—as shown in
Figure 8.6. It is this deflation that is pointed to as a possible path for the United States, so we need to look closely at the situation in Japan. While in total it amounted to 20 percent over 20 years, that was in the 1 percent range per year—not a disruptive level. While deflation hurts debtors, the amount that Japan experienced has not been disruptive, and could be managed if the Japanese level did occur, in the United States.
Figure 8.6 Japanese Domestic Goods Prices Dropped from 1980 to 2003
Figure 8.7 Japan’s Debt Jumped while the United States’ Was Flat in Terms of Percentage of GDP
Japan launched big government spending programs with stimulus packages to expand infrastructure, increasing the national government debt. The debt as a percentage of GDP is now at a very high level approaching 200 percent, as shown in
Figure 8.7. While the United States worries about its federal government debt, the comparison in
Figure 8.7 (which is shown as a ratio to GDP to allow comparison across the different-size economies) indicates the rapid Japanese expansion. The comparison is important because U.S. policymakers are throwing caution to the wind about expanding U.S. deficits. We are just starting on the path of quantitative easing, so the data haven’t yet been compiled regarding what has happened in the United States. The stimulus probably helped Japan to avoid a destructive depression from its slowing credit bubble, but Japan’s economy did not recover quickly.
The U.S. Flow of Funds data shows the total debt-to-GDP ratio at 370 percent of GDP (refer back to
Figure 5.1). This is more than twice the level that the Japanese economy started with when it entered its lost decade in 1990.
Quantitative Easing Is What You Do after Cutting Rates to Zero
To stimulate its economy, Japan cut its rates to zero. Easy credit was expected to expand investment and provide loans to consumers to spend. Today, U.S. politicians tell the same story.
Quantitative easing (QE) is the step beyond the traditional lowering of interest rates. The Bank of Japan (BOJ, which is equivalent to our Federal Reserve) launched an experiment to provide extra liquidity to the banks by buying Japanese government bonds and providing even more liquidity to the weak banks that had many bad debts on their books, mostly from real estate where prices had collapsed.
Figure 8.8 shows the easing on the BOJ’s books as excess reserves.
Combining a closer look with the interest rate of the overnight call (i.e., a short-term interest rate) rate of the dotted line, we can see, in
Figure 8.9, that the experiment got the interest rate to zero. The policy has been called the Zero Rate Policy (ZRP).
The experiment was considered bold. It lasted five years, from 2001 to 2006, providing banks with $250 billion of excess reserves to expand the economy. However, you already know the answer to what happened: It didn’t work.
Figure 8.9 Japan’s Quantitative Easing Achieved a Zero Interest Rate
So let’s look further at what happened to important economic measures. The most successful comparison is to the stock market, where the rebound during the period was noticeable, as shown in
Figure 8.10. This was important history and relevant for the repeat of the experiment in the United States. The astounding jump in the U.S. stock market from March 2009 of 60+ percent could possibly have been predicted if the Japanese experience were applied to the United States. The United States began its QE around that time period and our stock market rose. There is a message for the U.S. stock market about what might happen when the U.S. exits Quantitative Easing in the Japanese history as well. In Japan the stock market collapsed again to the level of entering the QE phase.
Also, the currency in circulation moved up—but not far, as shown in
Figure 8.11.
One would expect the flooding of liquidity and growing deficits to weaken the yen, but it did not (see
Figure 8.12). Japan still enjoys a trade surplus, which has kept the currency strong.
Note that in
Figure 8.12, the yen is stronger with a downward movement, because this is the number of yen per dollar. A reason for the continuing yen strength was the trade surplus, which came from the attractive Japanese products that kept the yen in demand, as shown in
Figure 8.13.
To confirm that the Japanese Zero Rate Policy was an unusual distortion of typical interest rate levels,
Figure 8.14 compares the official central banks’ overnight rates of Japan, the United States, the European Union, the United Kingdom, and Canada.
Figure 8.11 Japan’s Monetary Base Increase Did Not Move Currency
Figure 8.12 Japan’s Quantitative Easing Didn’t Hurt the Yen
Figure 8.14 Japan’s Interest Rate Has Been the Lowest of the Major World Economies
Figure 8.15 shows how the quantitative easing was funded by the BOJ buying government bonds. This was accomplished by buying government bonds from the commercial banks, by creating new deposits in the name of the banks, and taking the government bonds onto the BOJ balance sheet. The increase in government bonds matches the increase of reserves.
The BOJ’s process is quite different from that being taken by the U.S. Federal Reserve, which has been selling off its holdings of government bonds to fund its loans to banks to purchase toxic assets, poor-quality loans like mortgages to people who aren’t paying.
A problem for the Japanese economy was that although the BOJ was providing liquidity, the commercial banks avoided making new loans by buying government bonds, as shown in
Figure 8.16. This is the same problem in the United States. The Fed has provided big sums, but the result is that money has gone elsewhere, rather than to new loans.
The Japanese government added to its deposits at the BOJ just at the start of the easing, but then removed them over the time of the experiment, as shown in
Figure 8.17.
As the excess reserves were eliminated, the BOJ provided new direct loans after 2006 to maintain a stimulating effect, as shown in
Figure 8.18. This is almost a mirror image of the approach of the Federal Reserve who had extend hundreds of billion of loans to financial institutions in emergency funds in 2008, and then began quantitative easing in 2009 (buying MBS, etc.) and eliminated the big direct loans.
Figure 8.15 Japan’s Quantitative Easing Was Funded by Buying Government Securities
Figure 8.17 Government Deposits at Bank of Japan Declined
Figure 8.18 As Deposits Dropped after 2006, the Bank of Japan Extended Loans
Figure 8.19 The Bank of Japan Increased Foreign Currency Assets
In late 2008, the BOJ shifted its policy from not holding much foreign currency to now holding $100 billion more, as shown in
Figure 8.19. One guess is that BOJ policy is to not automatically buy U.S. Treasuries, with the trade surpluses, because the BOJ has not figured out how to invest the money.
Comparing Quantitative Easing in Japan and the United States to 2009
The easing in Japan to provide excess reserves was only one-third as big as the United States so far. In this low-rate environment, there is less incentive to remove the deposits from the Fed, so excess reserves have stayed at the Fed and have grown. The latest Fed data shows a big jump in the U.S. excess reserves, much like the quantitative easing in Japan—see
Figure 8.20—but it is not clear what toxic assets may have been bought from the banks, because the Fed is being secretive. Japan’s banks should be able to extend loans, but they are not doing that very rapidly. It is important to note the differences. The United States is acting more quickly in the cycle and with even bigger amounts.
Figure 8.20 U.S. Excess Reserves Are Triple Japan’s to 2009
Relative sizes compared to GDP suggest that Japan’s increase in money was big. Because the relative size of the Japanese GDP is only about a third of the United States’, the relative size of the credit expansions were about the same at the start, as shown in
Figure 8.21. The United States has continued to expand more in late 2009, rising to 7.5 percent where Japan’s peak was under 5 percent of GDP. The surprise is how fast the Fed expanded its programs, and since it has promised more, the end is not in sight.
Figure 8.22 shows how the Fed moved much faster and with a bigger affect on its balance sheet than did the Bank of Japan.
The bigger movement and the speed that the Fed expanded its balance sheet indicate that the affect on the United States should be bigger, too. The fear is that the U.S. trade deficit, combined with the rapid expansion of the Fed’s operations, will be disastrous in terms of confidence in the dollar.
Figure 8.21 Japan’s and the United States’ Expansions Are Similar in Terms of Percent of GDP
Figure 8.22 The Bank of Japan’s Asset Expansion Was Less than the U.S. Federal Reserve’s
Trade Deficit and Surplus Are Opposite Between the United States and Japan
A major difference between Japan and the United States is that Japan enjoys a capital account surplus, whereas the United States has accumulated a huge debt to the world, as shown in
Figure 8.23. Using the similar method of comparing the relative sizes by ratio-GDP is only part of the story because the deficits accumulate over time.
Since 1985, the accumulated current account balance of the United States is a negative $6,893 billion, whereas for Japan, the accumulated surplus is $3,234 billion. The difference is pronounced.
The current account of Japan is made up of two broad components: the trade surplus and returns from investments abroad. A closer look reveals that more is made from investments outside Japan that are now paying returns than from trade.
Figure 8.24 shows the Japanese current account surplus in the higher line. The lower line shows the amount of the current account surplus that comes from trade. The difference between the two lines is the amount of foreign investment income. So although Japan is enjoying a very positive current account calculation, trade surplus is less than it used to be. Japanese bankers funded much of the investment in the Asian Tigers’ economies for their productivity and growth. Wage rates in Japan were not competitive with Indonesia, China, and the Philippines. That meant that relatively less was invested in Japan, leaving the economy at home stagnating. But the returns from foreign investment have grown to make the current account balance positive.
Figure 8.23 Japan’s Current Account Is a Surplus whereas the United States’ Is a Deficit
Figure 8.24 Japan’s Current Account Is Much Higher than Its Trade Surplus
Figure 8.24 also indicates a drop in Japanese trade surplus.
Comparing the National Government Deficits of Japan and the United States
As mentioned earlier in this chapter, Japan’s many stimulus programs ramped up Japan’s outstanding national government debt toward 200 percent of GDP, but that took almost two decades. The growth in that debt compared to the United States shows how much faster the United States has expanded (see
Figure 8.25).
As mentioned, the GDP of Japan is smaller than the United States, so dividing the deficit by the GDP gives a comparison based on the size of the two economies. Then the size of the U.S. deficit is not so much bigger than Japan’s, even as the speed with which it jumps is more dramatic (see
Figure 8.26). A projection for the U.S. deficit to continue at the $1.5 trillion level in the 2010 decade is assumed in this view. On the relative basis of ratio to GDP, the $1.5 trillion U.S. deficit is about what Japan grew to over 10 years. The United States jumped to this very big level of bailouts and stimulus within less than two years of recognition of a crisis. Of course, we had a head start from waging a couple of wars.
Figure 8.25 U.S. Annual Deficit Is Growing Much Faster than Japan’s
Lessons from the Japanese Experiment
The position of the United States is similar to Japan because the big debt growth of the United States is now just starting to unwind like it did in Japan in 1990. The reactions of the Bank of Japan and the U.S. Federal Reserve are similar in cutting interest rates to zero and using unconventional methods to buy assets to expand their respective balance sheets. Further, both central governments went into deficits to support their economies. From 2001 to 2006, Japan went to quantitative easing, adding $250 billion to their excess reserves, to drive the rate to zero and to stimulate the economy through the banks. Japan’s debt, at 160 percent of GDP, would be expected to be inflationary, but it wasn’t.
Figure 8.26 Japan Took a Decade to Ramp its Deficit to U.S. Level When Compared as % of GDP
The United States has acted even more precipitously, with even larger promises of intervention than Japan in its quantitative easing. Japan has taken almost two decades to do what the United States is planning to do in two years. What can we learn from these results?
1. The Japanese economy did not react very much. The Japanese spent trillions, but the economy did not return to robust growth. Basically, the results were less than hoped for, but perhaps they avoided a worse downturn. The Japanese stock market dropped from 38,000 in 1990 to 8,000, went back up double during the easing, and returned to 8,000. After 1990, Japan’s GDP stayed level. The comparison here is that if we are like Japan, we could be in for a slow economy for a long time. But...
2. Compared to Japan, the U.S. reaction is bigger. The U.S. quantitative easing is bigger. The balance sheet of the Bank of Japan didn’t rise as much as the Fed. The Fed is still adding liquidity. Deposits at the BOJ by Japan’s central government didn’t balloon as they did in the United States. Obama started with a new fiscal stimulus, which is likely to be bigger than Japan’s. The United States is in much weaker shape because of its accumulated trade deficits. The United States can’t run big deficits and expand government programs for the financial community, for autos, and for new infrastructure without inciting inflation. So the dollar will fall.
3. The trade deficit and trade surplus have opposite effect on the two countries. The major difference between the United States and Japan is that Japan enjoys robust returns from its foreign investments and has consistently run a trade surplus. Together, those give Japan a strong current account and keep its currency strong. The strong yen has been instrumental in keeping the price of imports (especially oil) at reasonable levels and that, in turn, has helped keep inflation low. Consequently, despite a big increase in Japanese government debt, the yen has mostly increased against the dollar since the start of their bubble burst in 1990. Thanks to its strong currency, a modest deflation has been apparent in Japan’s Wholesale Price Index. Such a modest deflation is not to be feared, because it increases the purchasing power of the citizenry without triggering the more serious consequences such as witnessed in the United States during the 1930s Depression. It is runaway inflation that is most to be feared.
4. Foreign investment by Japan is a strength. In the face of the accumulated trade deficits and expanding budget deficits, the United States faces the problem of attracting foreign investment to continue to buy foreign necessities like manufactured goods and oil, at the same time as the accumulated and growing government deficit for future retirement obligations leads to new federal government borrowing that cannot easily be turned off. The interest on the growing outstanding debt will make it impossible to pull back the U.S. deficit.
5. The lesson of Japan is that even very big government interventions are not as effective in reversing economic slowdown after a big bubble created by too much debt bursts. The U.S. disaster is extremely serious for the world economies because so many depend on U.S. consumers to purchase products of the world. The continued economic slowing is not likely to be mitigated by the record size of the U.S. bailouts and economic reactions if Japan’s rather lackluster economic growth holds for the United States.
6. As was the case with Japan, could the U.S. deleveraging be drawn out? The structural weakness of the United States as the largest debtor in the world (as opposed to the largest creditor, as Japan was going into its crisis) leads me to expect a loss of confidence in the dollar that will not allow the decade-long slow economy that Japan experienced.
When foreigners lose confidence in holding Treasuries—and they have already lost confidence in holding Agencies—the U.S could enter a crisis the likes of which occurs in overindebted countries, such as was the case with the Asian Tigers in 1998. The consequences of an overreaction of extreme bailouts, one after another until sanity returns, could be more damaging for the U.S. dollar.
This gives rise to the potential that the crisis will be sharp, as was Japan’s in the beginning, but then—because of a weak dollar, versus a strong yen—morph into something even more dangerous: a full-blown currency crisis that shatters the dollar’s global hegemony.
The longer result will be money flooding the planet, creating a currency crisis and inflation. If I am right that the situation in the United States today, of debt deleveraging being counterbalanced by government programs even bigger than Japan’s and Roosevelt’s New Deal, then I think the deflationary forces in the United States will be minor and short. The problems of accumulated government deficit and trade deficit leave little room for piling new debt and expansionary policies on our system without long-term deleterious effects for the dollar.
Investment Implications in Japan
The Democratic Party of Japan gained power in September 2009 by unseating the Liberal Democratic Party, which dominated Japan for half a century. Japanese Prime Minister Yukio Hatoyama named Naoto Kan as the new Finance Minister in January 2010. Japan’s new central banker surprised the financial community by speaking candidly that he did not want the yen to rise. News stories have said he is on a mission to blow up the yen. The strategy is to debase the yen, which would inflate assets and, more importantly, get exports going via more competitive pricing. Kan is the sixth Japanese finance minister since August 2008. He will have to manage the world’s largest public debt, as a percent of GDP.
The fiscal and economic policy shift to focus more on the economy is thought by many as a support for the stock market because as the yen weakens, exports improve. Intervention in the currency market could be possible if he sticks to his comment that the yen should not rise above the 95 yen/dollar.
So, as I always say, let’s look at the data.
Figure 8.27 shows the big drop in the stock market and the general rise in the yen. Analysts are suggesting that the yen may decline, so that the stock market might become a better investment as indicated by the arrows at the very right of the chart. The Nikkei 225 may rise as the yen falls. The Nikkei in early 2010 is selling at a 74 percent discount to its 1989 high (38,916). Interestingly for U.S. investors, the rise in the yen has meant that the drop in Japanese stocks from the peak was a smaller 57 percent.
I think there is more to this story than to just look for opportunities in Japanese stocks. It was not just the stock market that crashed over the last two decades; interest rates crashed as well.
Figure 8.28 shows the amazing correlation in the drop of interest rates and the stock market together.
Figure 8.27 The Yen Has Been Strong As Stocks Fell. Will this Reverse?
Figure 8.28 Japanese Interest Rates Collapsed Along with Stocks
The Japanese government actively pursued easy credit policies to decrease rates with the hope of improving the economy. They were not particularly successful at reviving stocks. They would not have been successful at lowering rates had the yen not continued strong.
Figure 8.29 shows the dramatically low interest rates in Japan and the generally stronger yen. On this chart I’ve shown the number of yen to purchase a dollar, so that as the line drops it is an indication of a strengthening yen. The 10-year rate briefly touched a bottom of 1 percent in 2003. It would seem unlikely to return to that level considering the size of the government deficit and the announced policy by the government to keep the yen from rising. The right-hand side of the chart suggests that if the yen were to weaken, it could pressure rates to rise.
The implication of a political move of the new party to policies that will let the yen fall should be to help exporters and Japanese industry so that their stock market might recover from two decades of losses. That might be the case, but foreign investors, who might be getting significantly higher prices in Japan for stocks denominated in Japanese yen, would also be losing in the exchange rate of the yen. It’s a lot less clear to me how successful a U.S. investor would be in buying Japanese stocks.
Figure 8.29 Rates Dropped with the Strong Yen. If the Yen Falls Rates Could Rise
The yen has been a strong currency throughout the whole postwar period. It would seem to me that a far easier play would be to directly invest in the falling yen. It is the more direct goal rather than the two steps required for stocks to rise. Now, of course, the problem is what would the yen decline against? The whole story of this book has been that the dollar is being debased by the U.S. government. Looking back over the figures in this chapter, one can see that the Japanese government has done an amazing job of accumulating government debt of 200 percent of GDP, which would have destroyed the currency of most countries. The strength of the yen came from its value in purchasing Japanese-produced goods. Japan’s trade surplus kept the yen strong. But that trade surplus has mostly disappeared. The current account of Japan has been supportive of the yen, as Japanese businesses successfully invested abroad. The returns on those investments have been very strong and those returns are part of the current account. The returns on foreign investment are probably not as effective in supporting the yen as are the trade surpluses. My conclusion lines up with analysts who suggest that the government of Japan will be successful at managing the yen downward against major world currencies like the dollar.
I look beyond the Japanese stock market and the yen for one more investment opportunity that may become a “play of the decade”: I think Japanese interest rates are too low. Low rates were a policy objective of the Bank of Japan, with the goal of spurring investment and growth in the country. While Japan has avoided the kind of disaster that befell the United States after the 1929 bubble, Japan’s economy has been lackluster. One of the key reasons that rates could be kept so low for so long was that there was no inflation. In fact, there was modest deflation. Bond investors look to the real yield they obtain after inflation is taken out of the nominal rate of interest that bonds pay. In Japan, with a deflationary component, the real interest-rate returns to investors amounted to the regular bond interest rate plus the deflation. That is why after the yen were returned to the investor, they were able to purchase more after deflation. And there is a small side benefit: the return from deflation flies under the government radar as if it didn’t exist, and is therefore not taxed. So while the real rate on Japanese bonds was low, the real rate after tax was slightly better. There is one more twist in that the value of the yen increased against other currencies, which increased the international value of the returns to investors. That is also a benefit that is not taxed to the Japanese investor. This last point is probably the justification for Japan’s ability to maintain the lowest interest rates in the world for a decade. Even though during this period the yen did not strengthen significantly, there have been expectations that the yen would do well.
So my conclusion would be that if we see specific evidence of the government actively pursuing policies that will hurt the yen, then the order of investment opportunities is: first to expect interest rates to rise to compensate for the decline of the yen. The second best investment would be a direct short of the yen expecting it to fall from around 92 the dollar toward 100. (It sounds backward but this is yen per dollar and the number moves opposite to the value.) I’m sure there are opportunities to invest in Japanese stocks in such an environment, but I think the risks are higher. The stock market success in the decade ahead starting at 75 percent below its peak in 1990 does seem like a good opportunity, and moving from 10,000 to 15,000 for the Nikkei 225 would seem a reasonable target in a few years.
The play to short Japanese 10-year interest rate futures seems like another “trade of the decade.” The current rate is only 1.5 percent. It has not been below 1 percent for five decades, and good sense says it would be impossible to go below 0 percent. In 1990 the rate peaked above 8 percent just after the peak of the stock market. If, as many commentators believe, a more active government is able to produce an expanding economy, that should drive rates higher. If, as is also expected by the commentators, the yen is no longer expected to rise and may even be actively managed by the government to weaken, that would also be a reason for investors to demand higher returns. The government has already created such a huge burden of debt of its own during these last two lost decades that would seem to add pressure in funding the interest on that debt when rolling it over. And finally, Japan faces the same kind of demographic bubble of an aging population that will expect government support and that will keep deficits huge. So my conclusion from an investment point of view would be to consider expecting Japanese interest rates to rise in the decade ahead.
The Japanese experiment did not bring big inflation and that example is pointed to by politicians who say we need not worry about inflation in the United States from our expansionary influences of quantitative easing and deficits. I think the important differences between our countries explain Japan’s deflationary response. So to provide the extreme counterexample, the next chapter focuses on the most famous of inflationary experiences—the destruction of the mark in Weimar Germany, along with commentary on other countries.
