Why Japan Fell ... And What it Teaches Us
It’s hard to remember that in the 1980s Japan had the world’s most admired economy. It would, people widely believed, achieve the highest living standards and pioneer the niftiest technologies. Nowadays, all we hear are warnings not to repeat the mistakes that resulted in Japan’s “lost decade” of economic growth. Japan’s cardinal sins, we’re told, were skimping on economic “stimulus” and permitting paralyzing “deflation” (falling prices). People postponed buying, because they
expected prices to go lower. That’s the conventional wisdom—and it’s wrong.
Japan’s economic eclipse shows the limits of economic stimulus and, at least in modest doses, the exaggerated threat of deflation. There is no
sector job creation and investment, and substitute for vigorous private-
that’s missing in Japan. This is a lesson we should heed.
Japan’s economic problems, like ours, originated in huge asset “bubbles.” From 1985 to 1989, Japan’s stock market tripled. Land prices in major cities also tripled by 1991. The crash was brutal. By year-end 1992, stocks had dropped 57 percent from 1989. Land prices fell in 1992 and are now at early-1980s levels. Wealth declined. Banks—having lent
on the collateral of inflated land values—weakened. Some became
insolvent. The economy sputtered. It grew about 1 percent annually in the 1990s, down from more than 4 percent in the 1980s.
Despite massive stimulus, rapid growth hasn’t resumed two decades later. Although the Japanese reacted slowly, they adopted the advice of economics textbooks. They raised spending, cut taxes, and let budget deficits balloon. Gross government debt soared from 63 percent of the economy’s
gross domestic product in 1991 to 101 percent of GDP by 1997. It’s now
about 200 percent. The Bank of Japan (its Federal Reserve) cut interest rates, going to zero in 1999—a policy that, with some interruptions,
Deflation doesn’t explain persisting economic stagnation. Japan’s consumer prices have declined in nine of the last 20 years; the average annual decline was six 10ths of 1 percent. “People aren’t going to say,
‘I’ll wait until next year to buy a car when the price will be a half a percent cheaper,’?” says economist Edward J. Lincoln of New York University, a Japan specialist. If the Japanese were delaying spending, the household saving rate would have risen; instead, it fell from 15.1 percent of disposable income in 1991 to 2.3 percent in 2008.
Japan’s lackluster performance has two main causes. One is the “dual economy”: a highly efficient export sector (the Toyotas and Toshibas) offset by a less dynamic domestic sector. Until the 1980s, Japan depended on export-led growth that created jobs and investment. An undervalued yen
percent of the economy carrying the other helped. “You had 20
80 percent,” says Richard Katz of The Oriental Economist.
But the yen’s appreciation in the mid-1980s—making Japan’s exports
more expensive—doomed this economic strategy. Ever since, Japan has searched in vain for a substitute. Cheap credit (which fueled the original “bubbles”) and many “reforms” haven’t sufficed. Japan’s domestic sector remains arthritic. Japan has among the lowest rates of business creation of major industrial countries. Indeed, its best recent years of economic growth, from 2003 to 2007, occurred when a weaker yen revived exports.
The second problem is an aging, declining population, which dampens domestic spending. For decades, Japan’s traditional family—a
workaholic husband, a stay-at-home wife, and two children—has been
besieged, as anthropologist Merry White of Boston University shows in her book Perfectly Japanese. Even in 1989, the fertility rate (children per adult woman) of 1.57 was below the replacement rate of about two. The poor economy further discourages family formation. For men, the age of first marriage is 35, up from 27 in 1990, says White. The fertility rate is about 1.3.
So Japan’s economy is trapped: a high yen penalizes exports; low births and sclerotic firms hurt domestic growth. The lesson for us is that massive budget deficits and cheap credit are, at best, necessary stopgaps. They can’t correct underlying economic deficiencies. “Stimulus” policies are now the main focus of U.S. economic debate—but shouldn’t be. Success
or failure ultimately depends on private firms. We ought to encourage their expansion by reducing regulatory burdens and policy uncertainty. If we don’t, our mediocre recovery could mimic Japan’s.
Holiday Shopping Battle Starts to Get Pitched
NEW YORK) — From free shipping from Walmart to Sears stores open on Thanksgiving for the first time, the battle for holiday shoppers' dollars has begun in earnest.
The early competition to break through shoppers' caution about spending promises savings for those willing to buy amid an economy that's still worrying many. It also promises convenience. Retailers are offering deals anytime, anywhere their customers want, through websites, smart phones and Facebook. (See the All-TIME 100 gadgets.)
Black Friday, the day after Thanksgiving that typically kicks off holiday shopping, is not only being marketed as "Black Friday week," but for a growing number of stores, "Black Friday month."
As for Thanksgiving, some retailers like Sears and Gap's Old Navy hope shoppers will head to stores after they finish their turkey feasts. On the Web, Kohl's Corp. and Target Corp. are among many merchants dramatically stepping up deals that day, counting on that holiday to be one of the busiest days of the year online.
"Everything is faster and sooner," said Dan Grandpre, editor-in-chief of Dealnews.com, which opened an office in Dublin, Ireland, a few months ago to monitor the frenetic pace of offers, particularly during the holidays. Dealnews is based in Huntsville, Ala.
Walmart Stores Inc. is clearly going for the jugular in the holiday retailing fight. It announced Thursday that it will offer free shipping on nearly 60,000 online items — with no minimum purchase requirement.
The offer, which includes most electronics, jewelry and toys, will run through Dec. 20. Return shipping is also free, or items can be returned to a local store. (See more on Walmart's free shipping deal.)
Walmart's free offer comes on top of similarly aggressive free shipping programs from Target and J.C. Penney. Walmart's deal adds to the discounter's Site to Store program, which lets customers buy an item online and have it shipped free to their local Walmart store for pickup. Walmart.com is even testing a service at nearly 800 stores that lets customers see inventory and purchase products right from home. The online orders are usually ready to be picked up at a store within four hours. That concept isn't new, but many stores are joining Walmart in trying to speed up the turnaround time, says Noam Paransky, retail strategist at Kurt Salmon Associates.
"Retailers are trying to be in front of customers 24/7," Paransky said. With the wider adoption of smart phones, "it's exploding this year."
Facebook.com recently launched its Deals program, teaming up with a number of stores including Penney and Gap Inc. The offering allows shoppers to "check in" using smart phones to these shops and reap rewards or discounts. The intense marketing is happening in a season in which shoppers are expected to spend only a little more than last year. Unemployment is still stuck close to 10 percent, and consumer confidence has been anemic for months and months.
The National Retail Federation expects a 2.3 percent increase in spending to $447.1 billion. That would fall short of the 10-year historic average of 2.5 percent, according to the retail trade group.
Online, the prospects are brighter. Online research firm comScore Inc. expects anywhere from 7 to 9 percent growth compared with a year ago, when business was up 4 percent over the previous year, according to its calculations. About 10 percent of holiday sales are made online, according to Forrester analyst Sucharita Mulpuru.
"You clearly have a consumer who is restrained. So you have this drive to encourage consumers to spend," Kevin Mansell, Kohl's president and CEO, said in an interview with The Associated Press. But a bigger factor is "retailers have to move with the consumer, and the consumer wants ultimately flexibility of buying. You have to move with her." Against this background, the holiday deals have come in rapid-fire succession. In the past 24 hours, Best Buy Co. announced it's discounting a number of its electronics items this Friday and Saturday. For example, it has a 40-inch LCD HDTV for $399.99.
Retailer Kmart said it's letting customers who buy items online pick up purchases on the same day at more than 600 locations. The retailer, owned by Sears Holdings Corp., also announced customers can now buy items through the Kmart2go mobile web site or smart phone applications and select in-store pickup. The apps also can be used in-store for product information.
But many are also not waiting to give shoppers a sneak preview of what type of come-ons they'll find the day after Thanksgiving:
— Target will offer discounts both online and in stores. It's offering a Thanksgiving Day sale online with deals including discounts of up to 50 percent off on electronics such as cameras, TVs, a Blu-ray player and video game console. In stores, Target will have 25 early morning Black Friday bargains, 11 more than last year.
— Staples is offering deals from 6 a.m. to noon including a $499.98 HP Laptop with an Intel Celeron 900 Processor marked down to $299.98. — The Disney Store plans to offer 20 percent off most items until 10 a.m. It also plans to open 110 locations at midnight.
China buys up the world
And the world should stay open for business IN THEORY, the ownership of a business in a capitalist economy is irrelevant. In practice, it is often controversial. From Japanese firms’ wave of purchases in America in the 1980s and Vodafone’s takeover of Germany’s Mannesmann in 2000 to the more recent antics of private-equity
firms, acquisitions have often prompted bouts of national angst. Such concerns are likely to intensify over the next few years, for China’s state-owned firms are on a shopping spree. Chinese buyers—mostly opaque,
often run by the Communist Party and sometimes driven by politics as well as profit—have accounted for a tenth of cross-border deals by value this year, bidding for everything from American gas and Brazilian electricity grids to a Swedish car company, Volvo.
There is, understandably, rising opposition to this trend. The notion that capitalists should allow communists to buy their companies is, some argue, taking economic liberalism to an absurd extreme. But that is just what they should do, for the spread of Chinese capital should bring benefits to its recipients, and the world as a whole.
Why China is different
Not so long ago, government-controlled companies were regarded as half-formed creatures destined for full privatisation. But a combination of factors—huge savings in the emerging world, oil wealth and a loss of confidence in the free-market model—has led to a resurgence of state
capitalism. About a fifth of global stockmarket value now sits in such firms, more than twice the level ten years ago.
The rich world has tolerated the rise of mercantilist economies before: think of South Korea’s state-led development or Singapore’s
state-controlled firms, which are active acquirers abroad. Yet China is different. It is already the world’s second-biggest economy, and in time
is likely to overtake America. Its firms are giants that until now have been inward-looking but are starting to use their vast resources abroad. Chinese firms own just 6% of global investment in international business. Historically, top dogs have had a far bigger share than that. Both Britain and America peaked with a share of about 50%, in 1914 and 1967 respectively. China’s natural rise could be turbocharged by its vast pool of savings. Today this is largely invested in rich countries’ government bonds; tomorrow it could be used to buy companies and protect China against rich countries’ devaluations and possible defaults.
Chinese firms are going global for the usual reasons: to acquire raw materials, get technical know-how and gain access to foreign markets. But
er the guidance of a state that many countries consider a they are und
strategic competitor, not an ally. As our briefing explains (see article),
it often appoints executives, directs deals and finances them through state banks. Once bought, natural-resource firms can become captive suppliers of the Middle Kingdom. Some believe China Inc can be more sinister than that: for example, America thinks that Chinese telecoms-equipment firms pose a threat to its national security. Private companies have played a big part in delivering the benefits of globalisation. They span the planet, allocating resources as they see fit and competing to win customers. The idea that an opaque government might come to dominate global capitalism is unappealing. Resources would be allocated by officials, not the market. Politics, not profit, might drive decisions. Such concerns are being voiced with increasing fervour. Australia and Canada, once open markets for takeovers, are creating hurdles for China’s state-backed firms, particularly in natural
resources, and it is easy to see other countries becoming less welcoming too.
That would be a mistake. China is miles away from posing this kind of threat: most of its firms are only just finding their feet abroad. Even in natural resources, where it has been most active in dealmaking, it is not close to controlling enough supply to rig the market for most commodities. Nor is China’s system as monolithic as foreigners often assume. State companies compete at home and their decision-making is consensual rather than dictatorial. When abroad they may have mixed motives, and some sectors—defence and strategic infrastructure, for instance—are too
sensitive to allow them in. But such areas are relatively few. What if Chinese state-owned companies run their acquisitions for politics, not profit? So long as other firms could satisfy consumers’ needs, it
would not matter. Chinese companies could safely be allowed to own energy firms, for instance, in a competitive market where customers could turn to other suppliers. And if Chinese firms throw subsidised capital around the world, that’s fine. America and Europe could use the money. The danger that cheap Chinese capital might undermine rivals can be better dealt with by beefing up competition law than by keeping investment out. Not all Chinese companies are state-directed. Some are largely independent and mainly interested in profits. Often these firms are making the running abroad. Take Volvo’s new owner, Geely. Volvo should now be
able to sell more cars in China; without the deal its future was bleak.
Show a little confidence
Chinese firms can bring new energy and capital to flagging companies around the world; but influence will not just flow one way. To succeed abroad, Chinese companies will have to adapt. That means hiring local
for managers, investing in local research and placating local concerns—
example by listing subsidiaries locally. Indian and Brazilian firms have an advantage abroad thanks to their private-sector DNA and more open cultures. That has not been lost on Chinese managers.
China’s advance may bring benefits beyond the narrowly commercial. As it invests in the global economy, so its interests will become increasingly aligned with the rest of the world’s; and as that happens
its enthusiasm for international co-operation may grow. To reject China’s advances would thus be a disservice to future generations, as well as a deeply pessimistic statement about capitalism’s confidence in itself.
Rocking the party
The mid-terms have triggered ructions inside both the Republican and Democratic establishments
THE swollen ranks of Republicans in Congress have clear marching orders from voters, said Mitch McConnell, the party’s leader in the Senate, shortly after their thumping election victory on November 2nd: “stop the big-government freight train and respect the will of the people who sent you there.” Alas, the voters did not append any fine print, and Mr McConnell and his colleagues are already arguing over how, exactly, to proceed. The Democrats, meanwhile, are bickering over the lessons of their
defeat. The two parties have little time to settle their internal differences before the outgoing Congress reconvenes for a “lame-duck”
session on November 15th, with several pressing but divisive budgetary matters on the agenda, among other controversial subjects. As the lame-duck session gets under way, both parties will elect their leaders for the new Congress, which convenes in early January. The top three Republican posts in the House of Representatives are unlikely to be contested. But Michele Bachmann of Minnesota (pictured above), who purports to represent the tea-party movement and thus the activists who helped to secure the new Republican majority, fired a shot across the bosses’ bows by challenging Jeb Hensarling, an equally conservative but less telegenic Texan, for the fourth slot, conference chairman. On November 10th she backed down. But the party’s grandees now know they must give weight to the views of their eager new cadres from the tea party. They plan to create a special post for one of the party’s new intake, and some are angling to have it go to Kristi Noem, a rancher from South Dakota who is billed as the next Sarah Palin. The Republican leadership has also appointed two newly elected representatives endorsed by the spiritual leader of the tea-party movement to the “transition team”
plotting the party’s course in the next Congress.
; The president's deficit commission: Nice tryNov 11th 2010
Yet there are already divisions between the most tannin-stained Republicans, who see their role as scourges of big government, and their less doctrinaire comrades. Jim DeMint, a senator from South Carolina, wants his colleagues to adopt a voluntary ban on earmarks, a form of pork-barrel spending particularly reviled by fiscal hawks. Mr McConnell, however, demurs, arguing that earmarks account for a negligible share of the deficit and provide a useful check on the president’s discretion over spending.
The Democrats, meanwhile, face internal troubles of their own. Nancy Pelosi, the soon-to-be-former speaker, has declared that she wants to stay on as the party’s leader in the House. That has appalled centrist
Democrats, who blame their poor showing in the election in part on Mrs Pelosi’s high and highly liberal profile. But their showing was so poor that they no longer have the numbers in the Democratic caucus to send Mrs Pelosi packing. At any rate, no other candidates have dared to put their names forward so far.
Republicans are delighted at the prospect of another two years to vilify Mrs Pelosi. They have replaced the banner that hung at their headquarters during the election campaign reading “Fire Pelosi” with one that says “Hire Pelosi”. Her intransigence also creates a logistical problem for the Democrats. The minority party in the House normally has one fewer leadership posts than the majority. If she stays on, one of her underlings will be bumped from the ranks. That has sparked a fiery contest between Steny Hoyer, the only centrist in the Democratic leadership, and James Clyburn, a prominent member of the black caucus, for one of the remaining slots.
Despite all this upheaval, the two parties will need quickly to decide their stances on at least two important issues during the lame-duck session, quite apart from grappling with the longer-term challenges involved in trying to come to terms with America’s huge deficit (see article). Unless Congress intervenes, tax rates will rise sharply on January 1st, as a series of temporary cuts adopted during the presidency of George Bush junior expire. Barack Obama and most Democrats in Congress have long advocated keeping taxes at their current levels for the vast majority of Americans, but allowing them to rise for the rich. The Republicans, for their part, want all the cuts made permanent, and argue that voters endorsed their stance in the election.
There is also a battle brewing over the budget for the fiscal year that began last month. The Democrats, fearing to be seen as spendthrifts, did not pass one, opting instead for a “continuing resolution” that maintains spending at the levels set in last year’s budget. That
resolution expires on December 3rd, leaving the federal government without the authority to spend any money. Several Republicans suggest the party should insist on taking an axe to the budget as the price for allowing the government to continue to function. And the Democrats may further sour the atmosphere by attaching to the budget measures the Republicans oppose, allowing gays to serve openly in the armed forces or granting citizenship to illegal immigrants who join the army or attend university. There are one or two glimmers of compromise. The senior members from both parties on the relevant House and Senate committees have promised to avert at least one of the impending tax increases. There is talk of extending all the cuts for a year or two, and linking any further extensions to a broader overhaul of the tax code: that would be an excellent outcome. Senators from both parties have also discussed trimming the budget for this year submitted by Mr Obama, but not nearly as fiercely as the most zealous Republicans would like. The leadership of both parties seems keen to avoid any melodramatic showdowns. But the Republican bosses, in
particular, do not know how obstreperous the firebrands in the lower ranks will prove.
Business Books: The 30-Year
History of the 2007-09 Financial Crisis
When the financial crisis of this decade is being taught in business schools in the next, All the Devils Are
Here could be the textbook. Bethany McLean and Joe Nocera methodically reconstruct the 30 years that culminated in the Great Recession, years in which Wall Street's relentless greed and Washington's delusional regulators jointly built a time bomb — and thwarted any attempt to disarm it.
We are familiar with the blast's wreckage: WaMu, Bear Stearns, Countrywide, Lehman. But the details in Devils tell us that every culprit of the meltdown — lax risk management, crooked subprime lenders, risky
bonds — had a precursor. We didn't learn from history, and we repeated it, catastrophically. (See 25
people to blame for the financial crisis.)
Devils does its best work in connecting the culpable — from Lewis Ranieri, a creator of mortgage-backed
securities in the late '70s, to Fannie Mae boss David Maxwell, who paved the way for the agency to buy mortgage bonds in the '80s, bonds graded AAA in the 2000s by outfits like Moody's, whose CEO, Brian Clarkson, fouled a proud corporate culture by whoring ratings for earnings. Former Fed chairman Alan Greenspan's rep takes one more ding in the slapdown of Brooksley Born, the commodities regulator who had the temerity to suggest that derivatives be regulated. She lost, and we lost, when derivatives blew up the whole system.
The depth of reporting is enormous. Nocera, a New York Times columnist, can take apart businesses as
well as anyone. McLean, a former securities analyst turned journo (both were colleagues of mine at FORTUNE) famously exposed Enron's profits as phantom. (See pictures of TIME's Wall Street
If anything, the weight of the reporting makes Devils a little slower than some of the other breathless
tell-alls about the crisis. But it's a small price to pay for this level of illumination. — by BILL SAPORITO
The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America — and
Spawned a Global Crisis
Michael W. Hudson
(Times Books; 365 pages)
Of all the rapacious and repulsive players in the financial meltdown, none were more rapacious and repulsive than subprime-mortgage lenders. And according to Michael Hudson, clinging to the bottom of that cesspool was Ameriquest Mortgage. "We are all here to make as much f______ money as possible.