.
BY COSTA VAYENAS
For outsiders, Japan is a land of mystery, formidable but opaque. Our perceptions are often little more than clichés that we try to apply, in vain, to an uncooperative reality.
In the 1980s, with its economy thundering on all cylinders, Japan was regarded with awe as the benchmark for management and productivity. Remember the wonder of just-in-time production, the much-revered circles of excellence? Back then, the Land of the Rising Sun basked in the economic glory of its crown jewels, the six Keiretsu. These vast, interlocking networks of companies – each with a big bank at the center of the web – controlled virtually all the strands of Japanese industry, guided by the omnipresent but impenetrable MITI.
Japan's muscular business model was also feared. After all, they bought the Empire State Building and half of Hollywood and would soon, according to the worriers, overtake the US as the dominant global economy. In fact, the story did turn into a Hollywood blockbuster, but as a disaster film leading a prolonged period of stagnation known as Japan's Lost Decade.
Some economists believe that Japan has still not recovered twenty years on. They attribute the country's malaise to an economic policy apparatus that failed to adapt to a changing reality and thus was unable to take effective countermeasures. Hero worship is so fickle: yesterday's invincible model is today's "obvious" loser.
Not only that; some pundits see Western economies succumbing to the same paralysis that froze Japan's economic juggernaut in the 1990s. But, as usual, we think reality is a bit more complex.
Rightly embarrassed by failing to foresee the big tsunami – the financial crisis unleashed by the burst housing and credit bubbles – a kind of Cassandra Complex has emerged among economists. Disaster lurks behind every data point. This time, despite the fiscal and monetary tools employed to combat the crisis – soaring government debt and oceans of new money printed by central banks –the West will still descend into its own Lost Decade. Or so they say.
We think that storyline is built on some false presumptions. In the US, and to a lesser extent the UK, the equation that ends up with the West repeating Japan's Lost Decade is missing a crucial element: Japan's steeply aging demographic profile. This factor explains a large part of Japan's economic anemia since 1990. Despite all the talk, the US and the UK have still relatively young and, more importantly, growing populations. In this regard, Italy and Germany, with their declining birth rates and populations, may be susceptible to Lost Decadism, but the West as a whole is not.
And Japan itself? Here, a new myth has recently emerged: With the first real change in government in more than fifty years, the way Japan conducts its economic policy will also change, so the story goes. Instead of an export-driven economy, we will see the dawn of a new age of domestic and especially private consumption. Indeed, the new Finance Minister, Hirohisa Fujii, and new the Bank of Japan Governor, Masaaki Shirakawa, at first seemed to advocate that storyline, expressing the view that a strong yen could help the Japanese economy.
While it's too soon to judge how this particular story will develop, it faces at least one daunting hurdle to a happy ending: again, demographics. We have difficulties imagining Japan's senior citizens going on extended shopping sprees, and hence we remain skeptical about the country for the time being. The future of Japan could well end up repeating its recent past.
Costa Vayenas is Head of Emerging Markets at UBS Wealth Management Research.
