This from Bloomberg this morning:
Japanese residential land prices fell to a 24-year low as job losses and wage cuts discouraged homebuyers, while tighter credit markets choked off funding for property developers.
Residential land prices fell 3.2 percent in 2008 to the lowest since 1984 and average commercial land prices dropped 4.7 percent to a three-year low, the Ministry of Land, Infrastructure, Transport and Tourism said today in a report. Overall property prices declined 3.5 percent, erasing two years of gains that followed a 15-year slump.
The decline in residential land values, which are about half of what they were at the height of Japan’s bubble economy in 1991, may continue as the recession deepens. The central bank forecasts the sharpest economic contraction in more than 60 years as an unprecedented decline in exports forces companies to cut production and fire workers.
Land prices have, of course, lain at the heart of the ongoing Japanese deflation problem. Do people still think they know what all those toxic assets lying about out there are actually worth? I mean, Japanese land values are just about to go below prices established more or less 25 years ago. So in property market terms at least, it isn’t the lost decade anymore, we’re moving in to the “lost quarter century”.
Yet the Japan lesson hasn’t been learnt by European and American financial authorities. Bernanke mumbles something like ‘Japan’s deflation was a result of too little action taken too late’. Sadly this is a widespread
belief as erroneous as that about American government and the Fed’s inaction during the Great Depression. Those guys do not see deflation, didn’t see too much debt and saw no
credit bubble.
Hi Marcin,
Yes, thanks, I don’t disagree at all. Here is an entire article about Nomura economist Richard Koo (who I have mentioned before on this blog). I think there is far too much arrogance floating around at the moment from people who haven’t the faintest idea why Japan has had deflation all these years. And Koo doesn’t even mention the demographic, ageing and declining populations angle, which, if you add it in surely makes things worse not better.
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FOR Nomura Research Institute’s chief economist Richard C. Koo, Main Street fame is a case of better late than never.
Until now, many in the West have paid scant heed to his theory that Japan’s 15-year-long economic stagnation was a result of debt-choked companies struggling to pay down their liabilities, and not just a big housing bubble that burst in 1990.
Many Japanese prime ministers had prevailed upon the Taiwan-born American to help them through the country’s ‘lost decade’. In fact, Mr Koo, 55, was the first non-Japanese to be invited to help formulate Japan’s five-year economic plans.
His feat is bettered only by his paternal grandfather, the late Koo Hsien-jung, who was the first Taiwanese to be made a congressman in the Upper House of Japan’s Diet in 1934.
The younger Mr Koo joined Nomura in 1984 after stints in the US Federal Reserve System. He writes for BusinessWeek, and his latest book, The Holy Grail Of Macroeconomics: Lessons From Japan’s Great Recession, was described as ‘brilliant’ by The Financial Times’ Martin Wolf .
Mr Koo remains modest about his acumen. ‘I was lucky on that score because I work for one of the largest financial firms in Japan and could see the flow of money,’ he says. ‘If I were not working in that kind of environment, I would never have come to my conclusions.’
An ‘invisible’ recession
HE HAS a big bone to pick with his fellow economists and journalists. They bashed Japan over 18 years for pumping in trillions to stimulate its economy only to see zero growth. The assumption behind that ‘accusation’, as Mr Koo describes it, is that Japan’s economy would not have grown no matter how large the stimulus and so it must follow that the country has squandered huge sums of money on useless projects – bridges to nowhere and the like.
But without such stimuli, Mr Koo stresses, Japan Inc would have collapsed.
Affable and garrulous, he flips through a copy of his latest book, The Holy Grail Of Macroeconomics, and points out a chart that he says Japanese Prime Minister Taro Aso used to convince his G-20 peers recently that fiscal stimuli was the way to jumpstart their sputtering growth engines. The chart shows that, with recurring stimuli, Japan’s GDP kept growing year after year even though its property prices plunged by 87 per cent between 1990 and 2007.
He then flips to another chart which shows that few Japanese companies were borrowing even when banks were willing to lend money to them interest-free. This counterintuitive trend led him to conclude that Japan – and now the world, he believes – was mired in a ‘balance-sheet recession’.
Balance-sheet what?
Well, he says, for anyone who has bought into talk that ‘the worst is yet to come’ without actually knowing what that means, this is what a ‘balance-sheet recession’ means:
‘This recession is an invisible one. No one wants to talk about it, especially if his balance sheet is underwater…(so) even in the very big companies, only a handful of people might be aware of their balance sheet problems, but they’re not going to tell their employees that they’re actually bankrupt.’ Banks, he adds, are similarly keeping mum on why their borrowers now have poor net worth.
In circumstance when the private sector is busy repairing its balance sheets, the usual tool of monetary policy – slashing interest rates – will not work. Companies intent on saving will not borrow to spend on capital goods. This means that the only way out of a downturn as sharp as the current crisis was ‘a very quick response’ in the form of governments themselves spending heavily on infrastructural projects
In this, he feels United States President Barack Obama’s US$787 billion (S$1.2 trillion) stimulus plan lacked a decisive punch. ‘In 10 months, the US will be losing more than six million workers,’ he forecasts. ‘Obama’s package is for 3.5 million workers. So by the time this fiscal stimulus starts working, you’re already behind the curve.’
What he really wanted the President to tell Americans is this: This is wartime, not peacetime. We’re going to start digging ditches now and fill them up to keep our GDP from falling. He muses: ‘That kind of crisis mentality, emergency thinking, which I think is essential, I haven’t seen from Obama yet.’
He is also puzzled as to why the Obama stimulus plan was presented as ‘a one-time thing’ when the US – and thus, the world – was in the midst of a prolonged depression. Japan learnt that lesson painfully: ‘When the economy turned bad, we put in fiscal stimulus, the economy grew and then we said ‘oh, the budget deficit’s too large’. We cut it, the economy collapsed again. We had a zig-zag the whole 15 years (of Japan’s prolonged economic decline).’
Mr Koo thinks China was doing ‘the best job’ in tackling the crisis with a 4 trillion yen (S$880 billion) stimulus. That is a bigger proportion of its GDP than the US stimulus package is of America’s GDP. He quips: ‘So China can argue: ‘We’re not free-riding on you, you’re free-riding on us!”
The only way out of this crisis, he says, is ‘a seamless, medium-term package of fiscal stimuli’, for it will take many years for companies to get their balance sheets back to black.
That said, he wonders if something should also be done about the over-exposure of some capital markets – such as Russia’s. When he asked a Russian TV reporter recently why she had quizzed him so much on the yen’s prospects, she told him that it was because she’d mortgaged her house in yen, and the rouble was tumbling.
‘Even though the (Russian) central bank is trying to control this and that, Russian companies just go abroad and borrow more money. And then later on… the value of the rouble collapses and their earnings collapse relative to the currency they borrowed in.’
What should Asia do once the world recovers? Mr Koo’s answer: Start growing domestic demand for luxury goods in fairly rich Asian countries. Asian income levels had risen so much that there were only so many necessities a person could bulk-buy. But, he cautions: Asians would have to cut back a bit on their work ethic for that shift to work.
As he puts it: ‘If you want them to buy luxury goods, you need to give them time to play with it.’