Politics & Policy

A Rise From The Rising Sun

Japan is coming alive after a twelve-year drought.

Tired of the meandering U.S. stock market? How about Japan? Believe it or not, the Japanese market is coming alive after a twelve-year drought.

Japan’s Nikkei 225 index rose an impressive 8% in last year’s fourth quarter and gained another 5% in this year’s first quarter. In fact, so far this year the Nikkei leads all major stock indices with a 12% gain. Compare this to our very own S&P 500, which has dropped 5% this year, and the spike looks that much more impressive.

It used to be that Japan’s economy and stock market looked set to rule the world. Back in the 1980s numerous economists hailed Japan’s industrial-targeting policy where the Ministry of Trade and Industry seemed to be effectively choosing the winners and losers. This “crony capitalism” played a big role as sectors favored by the government received subsidies and trade perks. A few large banks determined who got loans and who didn’t. And the economic manipulation worked. By 1989, the Nikkei peak reached about 39,000, more than ten times the U.S. Dow.

Despite the fact that Japan even adopted a Reagan-style tax-reform plan to lower rates and broaden the base during their big ’80s, their economy fell apart in the following decade. The ’90s saw the Bank of Japan repeatedly shrink the money supply and the Ministry of Finance continue to raise taxes. The falling money supply deflated prices and assets, and the stock market dropped 70%. Land prices fell by almost as much. Rising taxes pushed Japan’s economy even deeper into recession, causing budget deficits and national debt to skyrocket. This was the lost decade for Japan.

But lately things seem to be changing. The country’s basic money supply has grown by roughly 50% at an annual rate over the past six months. Appropriately, in response to the creation of new yen, the yen exchange rate has eased somewhat.

Prime Minister Koizumi is even talking about a new round of tax cuts. He is also attempting a reform package to open up the $1.8 trillion of savings controlled by the monolithic postal system and turn that into a private-investment vehicle controlled by individual citizens rather than the government.

Meanwhile, Japan’s enormous bad-loan problem, which has prevented commercial banks from extending credit and hangs like a lead weight around the economy, has been eased slightly by a new program to “securitize” these bad loans into bonds sold in the credit markets. William Seidman, who led the U.S. Resolution Trust Corporation over ten years ago with the same program of securitizing bad bank loans, has been advising Japan.

Continued monetary expansion, along with further deregulation and tax relief, could make Japan the surprise growth country of the new decade. Watch the country’s stock market as a barometer of future prosperity. While investing in the Japanese market is not for the faint-hearted, it could make a lot of sense.


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