The Center for Strategic International Studies hosted Richard C. Koo, the world renowned chief economist of Nomura Research Institute, for a speech titled “Great Recessions- Lessons Learned from Japan.”
This is one of the most insightful discussions I have heard in a while. Listen to the Audio here. As I have mentioned previously, Japan is different from the US in that they have maintained a restrictive immigration policy and low birth rate throughout their crisis which has amplified their stagnate growth.
However there are a few key points that stand out as potentially similar:
*Like Japan, the UK and US in the present cycle have massive asset deflation that is likely to undermine the economy for several more years, prompting repeated rounds of government stimulus.
*So far commercial real estate in the US has corrected about 30%, where as Japan's commercial market deflated more than 80% from the peak. Commercial real estate in the US is likely to come under significant downward pressure in 2010-2011.
*Individuals and companies are likely to continue paying down debt and building up savings for several years to come. This will be good for repairing individual financial health overtime, but will be a headwind for economic growth.
*Massive government spending did not create inflation in Japan because the on-going forces of asset and wage deflation were so enormous. A difference this cycle is that most of the western world is now in the throws of deflation and massive stimulus where as Japan was more an island of its own misery over the past 20 years. In other words, although Japanese stimulus did not create inflation there, concerted global efforts at stimulus and currency deflation may be more likely to create inflation longer term.
*Even if the government is able to keep GDP positive through government spending, it does not mean net job creation or corporate earnings growth will follow.
*It also does not mean that the stock market can continue to soar throughout. The following chart of the Nikkei may be indicative of the type of stock market action we have ahead of us for the next few years. From 38,000 in Dec 1989 the Japanese stock market traded with massive volatility to end 2008 at 6994:
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Thank you so much for this very thought-provoking link. I had not heard of Richard Koo before this.
I know little about Japan's situation other than the common stereotype of the “lost decades”. I found it challenging but interesting to think of their experience as at least a partial success story. Koo mentioned that even if Japan had done everything right by his lights, deleveraging would still have taken 8 to 10 years.
Danielle, you have been a voice of reason in seeing the secular bear downturn since 2000 as part of the normal business cycle, and not the end of civilization. As the crisis has unfolded, does it seem to you that this is indeed a different kind of recession than others in your lifetime? Does Koo's idea of a “balance sheet recession” resembling the Depression of the 1930s make sense with what you are seeing? If so, does this affect your model or your investing rules?
I think that there is no question that this recession is the worst since the depression and so it is definitely the deepest downturn in my life time. Given that we are in a secular bear period likely to last for a few more years, our investment rules have been conservative and focused mostly on capital preservation and income. This will continue. As Richard Russell has said, this is a time to hold on to what you have more than trying to make aggressive gains. I think if people adopt this into their approach, and can continue to work and save, pay off debt, they will come through this period just fine and be very well positioned for the next secular bull period perhaps 7-10 years from now.