Thursday, March 17, 2011

Be careful before making snap judgments on Japan's economy

The crises in Japan simply cannot be overstated.  When the damage inflicted by the 5th worst earthquake in recorded history is only the third-worst disaster in the last month, life is exceedingly difficult for the Japanese.

However, the amount of sheer nonsense being written about the effect on the Japanese economy by these events borders on the insane.  And I would believe some of it except most of this has been written before--and it was wrong then.  For example, Michael Lewis' 1989 Article: "How A Tokyo Earthquake Could Devastate Wall Street & The Global Economy" is making the rounds again.  Much as I like Lewis, this article is pure rubbish.

I personally remember making a bunch of apocalyptic predictions about the global economy following the Kobe earthquake--so I am FAR from guiltless on this.  But being so wrong about Kobe makes me extra careful this time.  Here is what we should remember about Japan.

  • This is an extremely stable society that has vast experience in dealing with major disasters (remember the damage caused by World War II).
  • MOST of the recent writing about Japan's economic difficulties has been produced by folks who think that because Japan's stock market isn't going crazy like it did in the 1980s, her economy is stagnating.  The truth is that Japan's core economy is stable and world-class.
  • The most notable thing about this current crises is that the Japanese yen is currently appreciating.  For a country in economic trouble, Japan sure has a funny way of showing it.
Here is a very good article on Japan's economy written before the earthquake.  It is important to remember that honest people felt compelled to defend Japan against the mindless bashers even before the latest calamity.  And the rest of us would do well to consider these facts when predicting how Japan will deal with the current crises.
The Myth of Japan's 'Lost Decades'
FEB 26 2011, 3:30 PM ET
By Eamonn Fingleton
TOKYO, Japan -- In this slot a few days ago I posed some historical questions that, judging by the email I have been receiving, have perplexed a lot of readers. 
Let me now fast-forward to our own time and try some questions that will probably prove almost equally perplexing. They concern the Japanese economy, that erstwhile juggernaut of world trade of the late 1980s, which, we are told, has been mired in stagnation ever since. 
Question 1: Given that Japan's current account surplus (the widest and most meaningful measure of its trade) totaled $36 billion in 1990, what was it in 2010: (a) $18 billion; (b) $41 billion; or (c) $194 billion?
Question 2: How has the yen fared on balance against the dollar in the 20 years up to 2010: (a) fallen 11 percent; (b) risen 24 percent; (c) risen 65 percent?
The answer in each case is (c). Yes, all talk about "stagnation" and "malaise" to the contrary, Japan's surplus is up more than five-fold since 1990. And, yes, far from falling against the dollar, the Japanese yen has actually boasted the strongest rise of any major currency in the last two decades.
How can such facts be reconciled with the "two lost decades" story? I don't think they can. There is clearly a contradiction here, and after studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth. 
Certainly anyone who visits Japan these days is struck by the obvious affluence even among average citizens. The cars on the roads, for instance, are generally much larger and better equipped than in the 1980s (indeed state of the art navigation devices, for instance, are more or less standard on many models). Overseas vacation travel has more than doubled since the 1980s. The Japanese boast the world's most advanced cell phones, and the biggest and best high-definition television screens. Japan's already long life expectancy has increased by nearly two years. Its Internet connections are some of the world's fastest -- something like ten times faster on average than American speeds. 
True, not all of Japan's indicators are equally impressive. The Tokyo stock market, for instance, has never recovered from its 1990s slump. more

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