Japan and Lessons Not Learned

Taro Aso, Japan's prime minister, is emerging as one of the most vocal proponents of a continued Government spending spree. This stance has been taken via criticism of Europe's only responsible leader, Angela Merkel, and her resolve to limit the German Government's future stimulus/spending activities. The leader of the world's second largest economy points to the experiences of his own country, in the early 1990's, when the Government staged a wholesale intervention into the financial system. We would concede that the present day United States and the Japan of two decades past are/were both inflicted with a similar strain of economic contagion i.e the spectacular rise and fall of real estate values. However, we do not disagree with Taro Aso as to the premises of his argument, but rather as to the conclusion itself.

It is widely acknowledged that Japan suffered a "Lost Decade" ,characterized by a deflation of values across all asset classes, as well as stagnant, only interrupted by declining, growth in the overral economy. However, a brief assessment of the data concerning Japanese GDP growth, as well as real estate and stock values produces the inevitable conclusion that Japan did not just lose a single decade, but Japan Lost Two Consecutive Decades.

We can not possibly fathom why the leader of a country would voice support for the same policies that had already led to a two-decades long stagnation in his country. The Japanese Government, in the 1990's, rushed in and propped up every large and ailing financial insitution via capital injections. The Bank's, fearing a further deterioration of required regulatory capital, failed to lend the money. The Government injected more capital. This ongoing process succeeded only in producing a Zombie Banking System that was allowed to pretend that losses did not exist. Sound Familiar?

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