Hat tip to Doug for sending this mention in businessinsider.com about these two articles:
OSAKA, Japan — Like many members of Japan’s middle class, Masato Y. enjoyed a level of affluence two decades ago that was the envy of the world. Masato, a small-business owner, bought a $500,000 condominium, vacationed in Hawaii and drove a late-model Mercedes.
But his living standards slowly crumbled along with Japan’s overall economy. First, he was forced to reduce trips abroad and then eliminate them. Then he traded the Mercedes for a cheaper domestic model. Last year, he sold his condo — for a third of what he paid for it, and for less than what he still owed on the mortgage he took out 17 years ago.
“Japan used to be so flashy and upbeat, but now everyone must live in a dark and subdued way,” said Masato, 49, who asked that his full name not be used because he still cannot repay the $110,000 that he owes on the mortgage.
Few nations in recent history have seen such a striking reversal of economic fortune as Japan. The original Asian success story, Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West.
But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.
The downsizing of Japan’s ambitions can be seen on the streets of Tokyo, where concrete “microhouses” have become popular among younger Japanese who cannot afford even the famously cramped housing of their parents, or lack the job security to take out a traditional multidecade loan.
These matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.
“This is how to own a house even when you are uneasy about the future,” said Kimiyo Kondo, general manager at Zaus, a Tokyo-based company that builds microhouses.
As living standards in this still-wealthy nation slowly erode, a new frugality is apparent among a generation of young Japanese, who have known nothing but economic stagnation and deflation. They refuse to buy big-ticket items like cars or televisions, and fewer choose to study abroad in America.
Japan’s loss of gumption is most visible among its young men, who are widely derided as “herbivores” for lacking their elders’ willingness to toil for endless hours at the office, or even to succeed in romance, which many here blame, only half jokingly, for their country’s shrinking birthrate. “The Japanese used to be called economic animals,” said Mitsuo Ohashi, former chief executive officer of the chemicals giant Showa Denko. “But somewhere along the way, Japan lost its animal spirits.”
When asked in dozens of interviews about their nation’s decline, Japanese, from policy makers and corporate chieftains to shoppers on the street, repeatedly mention this startling loss of vitality. While Japan suffers from many problems, most prominently the rapid graying of its society, it is this decline of a once wealthy and dynamic nation into a deep social and cultural rut that is perhaps Japan’s most ominous lesson for the world today.
The classic explanation of the evils of deflation is that it makes individuals and businesses less willing to use money, because the rational way to act when prices are falling is to hold onto cash, which gains in value. But in Japan, nearly a generation of deflation has had a much deeper effect, subconsciously coloring how the Japanese view the world. It has bred a deep pessimism about the future and a fear of taking risks that make people instinctively reluctant to spend or invest, driving down demand — and prices — even further.
http://www.nytimes.com/2010/10/17/world/asia/17japan.html?_r=2&pagewanted=1&hp
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From James Fallows and the Atlantic:
The author returns to his old Tokyo neighborhood and finds an inward-looking country that has lost its ambition.
We have a Toyko office and if asked people that work there say the same things as this article.
What’s worse?
2-3 years of house auctions like during the RTC?
Or…
10-15 years of slow but steady price delfation? Young people won’t be able to buy the kinds of houses their parents owned and old people won’t be able to move for fear of losing their tax status or overall savings being lost to price inflation when bank CD are returning only 1% interest.
A senior partner in my firm lived/worked in Tokyo for 16 years as an int’l tax partner with Andersen (biomedical/pharma transfer taxation..exciting). Chicago born US citizen, he also married a Japanese woman. In summary they exited with everything and moved back to La Jolla.
He agrees with the main points in the article AND highly expects the US to begin heading down that road due mainly to the entitlement tsunami that no one is attempting to address.
Another factor he sees happening now is the increasingly ‘subjective’ nature of drug/device approval here in the US due to the gov involvement in paying for healthcare.
In Japan, the gov picks up most bills, thus they are disinclined to approve the best drug/device as its expensive. They will, however, approve a drug that is 75% as effective but costs much less.
In the US we used to have a ‘high bar’ to get over, and if your drug could perform and get over that bar then everyone got approved and the market decided which drug to prescribe…those days of having the choice of the best are disappearing.
Thoughts directly from the streets of Tokyo…
jesus people…as soon as QE2 starts and ben starts buying RMBS, prices will start going up again and we can get HELOC money to live on….
stop worrying…free money coming soon!
The Japan scenario is definitely scary, and I’m worried about everything mentioned in the article. There are so many parallels to what’s happening here.
But if I take an overly simplistic look, their bubble seems much bigger than ours. The Nikkei quadrupled in about 6 years. The S&P didn’t even double, trough to peak, during our latest bubble. They grew faster and therefore fell harder than I expect we will. Again, I know this is very simplistic. I’d be interested to hear others’ thoughts as to why or why not my comparison makes sense.
I do not think the USA will have the same experience as Japan. While we are currently in a period of extreme caution, the overall mentality of the country has not changed. In Japan, morality is honored, while in the USA greed and trickery are honored. Just look at Masato in this article – he does not want his full name used because he is embarrassed that he cannot pay his debts. Here in the USA, people who challenge their debts and win are considered heroes. There is plenty of latent American ambition just waiting for the next scam/opportunity/bubble to emerge.
Good article, all very true. On the other hand, the upside is everyone in Japan just got 25% richer thanks to the big swing in exchange rate. Saving cash under the mattress in Japan has been quite effective the last 20 years.
We used to make fun of them for their banks offering 0.5% interest rates. Looks like we’ve joined the club!
I agree with IRE that the culture and attitude differences between Japan and American toward risk is very different, although I do not view it as pejoratively as IRE does. Americans accept the concept of bankruptcy and a fresh start more easily, although I agree that we have not seen much of that attitude lately, especially with respect to financial instituitions.
Also, 93% of Japan’s government debt is financed internally, which is very different than the US. That alone creates very different government incentives. Japan also started their ZIRP policy at a time when there was very little government debt, unlike the US.
The Japan experience is worth paying attention to, since we seem to be starting out the same way, but I think that there are big enough differences that we won’t wait as long to change policy and direction. Whether that change will be better or worse, and for who it will be better or worse, who knows.
Check out the movie “Toyko Sonata”.
I don’t think we’re going to go down that sad, gray road. For better or worse, American politics is about a thousand times more dynamic than Japanese politics. They had the same ruling party for 54 years! America may have some real wackos in office, but I doubt we’re going to end up with 20 years of “try the same thing since it didn’t work last time.”
The other thing to point out is that the US is much more spread-out geographically. We have a lot of major Real Estate markets in the US that didn’t “Bubble”, and have only seen modest declines–ie: Dallas/Fort Worth.
I would rate Tokyo as one of the most miserable city’s on earth. Everyone works 15 hours a day just to enjoy a short weekend of looking at a concrete jungle. 3-4 hour daily commutes standing on a train make the 5-805 merge in a comfortable car seem like a dream. Every show on their television stations is about food because that’s the last pleasure they have left. The yen carry trade unwinding has blasted the yen to record strength which can’t mean anything good for an export nation. The US will try with reckless abandon to do anything and everything to avoid a 20 year deflationary repeat of Japan.
The U.S. is still growing. That sets it miles apart from Japan. They honor conformity, we honor creativity, that makes us the land of google, facebook, et al.
Japan cannot grow. This sad, grey matchbox world is the end result of:
128,000,000 people
Total land: 374,744 km2
Total arable land 46,000 km2
Total permanent crop land (1% of total area) 4000 km2
Land remaining to live on 42,000 km2
That’s over 3000 people squeezed into each remaining livable square km by my quick estimate here. Please correct me if that looks wrong . . .
How happy would you be if your hour commute started with a white glove professional cramming you into a subway car?
http://www.youtube.com/watch?v=b0A9-oUoMug
ZIRP/Deflationary policy aside, they are a poor comparison on pretty much every other factor.
Another difference not so good for us….. American’s are in debt up to and beyond their eyeballs. Japanese are savers slowly getting eroded. We have nothing to erode. I’m in my 40’s and feel like an idiot for making the following statement…. but I feel like the new generation only knows google and facebook and youtube. They think they can all become singers and reality stars and they are used to buying whatever they want on mommy and daddy’s credit cards. Well, those credit cards are going away, and what do they have left other than squashed dreams. They are in debt, their parents are in debt and their country is in debt. Where do we go from here? Does the younger generation really have the spirit, the education and the will power to drive this country onward and upward?
AG Sage-Japan’s population is declining. The countryside is being emptied out. They simply aren’t having enough children, and they aren’t willing to make up the difference via immigration. Overcrowding is not the issue outside Toyko. (Of course, Toyko is one of the most crowded cities on earth.)
Perhaps the problem with Japan isn’t deflation, but the *duration* of the deflation.
IMHO, a quick deflationary episode clears the way for a healthier, more sustainable period of growth afterward — hopefully based on truly productive endeavors, and not bubbles.
The problem arises when we look only at asset prices, which is only one half of the equation. The other half — the cash used to buy the assets — gains value during deflation. Prices will NOT go to zero in a deflationary environment. There will be buyers at every tick down. Preferably, prices reach these buyers sooner, rather than later.
The faster we get through deflation, the sooner we get back to a sustainable economy. Trying to prop up asset prices in an environment of falling wages is a fool’s game. It is an abhorrent waste of money and resources that can be used in a much more productive way.
Geotpf,
What you are saying is the equivalent of: The U.S. isn’t a car-addicted sprawling suburbia because people *could* move to Wyoming and get around on horseback.