For example, here is the Nikkei itself, with its sobering chart from 1990 to the present day. In other words, over the course of 18 years, it has lost a staggering 701% of its value. A lifetime of investing. An exasperating recession that seems to be dragging on forever, with no end in sight.
Well, what has happened on the Japanese stock market is simply a reflection of what has happened in the country’s economy. Property prices, raw materials, wages and even a simple bottle of Coca-Cola have also been affected by this apathy or a gradual decline. Everything was more expensive 5, 10 or 15 years ago. Inconceivable for most of us, isn’t it? Many of you will remember that Japan used to be an expensive country, with the cliché of a coffee or soft drink costing almost 1,000 pesetas right in the centre of Tokyo back in the distant 1980s, when Spain was still ratifying its accession to NATO. Today, that drink would cost even less, between 700 and 900 yen. But the fact is that a Coca-Cola or a beer on the best terrace in Madrid or Barcelona also costs around 4, 5 or 6 euros. More examples: Nowadays, at any vending machine vending In Japan, a half-litre bottle of Coca-Cola costs 120 yen, which is 75 euro cents; and a standard set meal in any restaurant in Japan costs 6 euros, including a drink. You can even still find ‘everything for 100’ shops – yen, of course – meaning everything for 60 euro cents, or, in other words, everything for one US dollar. Obviously, the comparison with Spanish or European prices is stark, and if we compare it with prices in Britain and the pound, even more so.
Although this situation in Japan over the last 18 years may seem idyllic, deflation and recession can lead to extremely serious macroeconomic problems, as my colleague has already explained GFO in 'Inflate or Die'. So why has Japan managed to cope so well with this formidable deflation/recession, which has now been around for quite some time? How can we in the West deal with a hypothetical similar scenario? The answer is that Japan is a world away from Western ways of life, education and customs. To live with deflation for such a long period and maintain the health of the Japanese economy, one must have high productivity combined with a weak currency that allows for comfortable exports. Paradoxically, however, the Japanese population is quite thrifty (a logical reaction to a crisis) despite the fact that their banks do not pay interest on these savings in yen but do so in other currencies. And this fact does nothing to facilitate the revival of domestic consumption that the economy needs in order to grow.
If we compare these conditions with those found in Spain or Europe, the picture is bleak. Productivity is much lower and the euro is sky-high. Given this scenario, the ability to cope with sustained Western deflation over time gives pause for thought. The negative chain reaction scenario described by my colleague GFO It would indeed be devastating, but we must bear in mind the reality of the situation in Japan following 18 years of recession. Deflation in Japan does not reflect a nightmarish situation at all. What is more, day-to-day life for the average citizen is much more reasonable than the surreal excesses experienced in the late 1980s. Of course, we are not saying that it is a healthy or exemplary economy; the country and its companies face many difficulties. But we certainly see it as an example of how to tackle and survive prolonged deflation. Japan remains a member of the G7 (G8 including Russia) after nearly two decades of enduring the potential domino effect that could have irreversibly damaged the foundations of its economy (employment rate, productivity, businesses, banking, etc.).
We could therefore say that a deflationary scenario or a Western recession might bring things back to a more reasonable level after a period of lavish excess, but we should take a leaf out of Japan’s book if we want to avoid some of the terrible consequences that a recession brings. And that, dear friends, seems anthropologically very difficult for us Mediterraneans and Latinos in general.
For the time being, perhaps we should start to consider the idea that putting our money into equities may only be a sound investment in the long term. And when we talk about the long term in a recessionary environment, that timeframe can stretch far beyond what we are used to. It wouldn’t be a bad idea to start thinking a little more like short- and medium-term investors in emerging markets that are far removed from the deflationary scenario. Or perhaps to start thinking that our wealth growth should rely a little less on unproductive stock market speculation and a little more on corporate or employment income directly linked to productivity. I know this may sound like gibberish to many who are used to making easy money on the stock market, but in reality it makes perfect sense.
Although the outlook is likely to be a long one, we must not underestimate the ability of the world’s still-leading economy (the US) to emerge from the recession. Perhaps the Americans, despite all their economic and mortgage problems, will be able to overcome the deflation that seems to be looming over them (and us) much sooner than Japan. For the time being, unlike Europe, the US appears to be doing its homework: a currency at levels that facilitate exports, higher productivity than Europe’s (see chart below) and a cabin depressurisation which is forcing the Fed to cut $ rates to levels where mortgage holders and their banks can breathe on their own and take off the oxygen masks that have suddenly come down from their ceilings (central bank interventions and aid from the Bush administration).
It seems that we Europeans are destined to play the role of self-sacrificing carers for our American patient, although perhaps we’re just playing the part of incompetent fools. Never mind, the important thing is that the US overcomes this bleak scenario as soon as possible and pulls our old continent out of the mire. In the meantime, we should look to the only example of deflation/recession we have in our modern economy and learn how the Japanese weather and endure its effects.
We must realise that no one has said this will be a brief and fleeting affair. After this upheaval, nothing will be the same in the Western economy. It may be a long and arduous journey, but although many structures will be damaged, we will likely avoid a total collapse—at least of the vast majority of the system.
Goodbye, baby.