Many people talk about the “economic miracle” that has occurred in China since the late 1970s. And, of course, relative to the slow growth under Mao Zedong’s sclerotic leadership prior to that, it has been a quantum leap and the country is unrecognisable today.
However, there is another economic miracle in far East Asia that was arguably more profound than China’s, and that was the Japanese economic miracle that began in the aftermath of the devastating World War 2 but came to a grinding halt in the early 1990s. Haroon Bhorat from the University of Cape Town recently published an outstanding presentation on Japan, and as always his analysis is extremely insightful.
Japan was bombed into submission by the Allied forces, notably the Americans, and after the second atomic bomb devastated Nagasaki the Japanese government reluctantly agreed to unconditional surrender. Ironically, as Milton Friedman described the situation, “the best way to grow rapidly is to have the country bombarded”.
Japan had lost more than a quarter of its industrial capacity and was left with deeply depreciated, decrepit infrastructure, but Japanese society buckled down and applied itself to turning lemons into lemonade. Bank loans were granted at very low interest rates and the government offered generous depreciation provisions and deductions.
The internal savings rate, at about 18% of disposable income, was one of the world’s highest and provided the government with the ability to run budget surpluses for the first 20 years after the war ended. The Bank of Japan issued its first bond only in 1965.
But a few uniquely Japanese factors differentiate the country from all others in terms of industrial output: monozukuri (a synthesis of technological prowess, know-how, and spirit of Japan’s manufacturing practices) and keizen (continuous improvement through small, incremental changes in processes, products or services). These are deeply ingrained philosophies that Japanese people practise in everyday life. And whether that involves sweeping the floor or designing a rocket makes no difference; Japanese take pride in everything they do and constantly strive to do better.
Japan went from being a war-ravaged, predominantly agricultural-based economy to being a highly developed country with a high degree of economic complexity in the remarkably short time of just 25 years. Not even China has achieved this type of explosive growth.
However, by the late 1980s it had all started falling apart, quickly and then slowly. A variety of reasons have been put forward for Japan’s decline, ranging from huge price bubbles to productivity and demographic declines and the rise of China. Stock prices on the Japanese stock exchange soared to excessive levels, fuelled by a stock mania, and property prices in many urban areas went ballistic. This resulted in asset values in company balance sheets becoming hideously overvalued.
It was a classic case of “irrational exuberance”, to quote former US Federal Reserve chair Alan Greenspan. But what started as a bubble morphed into a 25-year growth decline for Japan, and it is still struggling to emerge from this trough. Even though the Nikkei 225 index is back close to its 1989 peak, the economy is still languishing.
By the mid-1990s a number of Japanese banks had gone bust, the inevitable consequence of overborrowing and excessive lending in prior years. The nightmare culminated in the middle of the previous decade with government debt of more than ¥1-trillion (twice the GDP) and a budget deficit dominated by two mandatory and constantly increasing components: servicing past debt and social security payments to an ageing population.
Against this rather depressing background one would be excused for writing off Japan. But it remains a highly advanced, modern society with many companies at the cutting edge of research, development and production. It still boasts many world-class multinationals such as Sony, Mitsubishi and, more recently, Fast Retailing (which owns UniQlo).
But its days as a wholesale investment destination are long gone. In the 1960s and ’70s the Scottish investment trust industry gained first-mover advantage in the lifting of restrictions on foreigners investing in the burgeoning Japanese market, and did exceptionally well in those days. Nowadays, Japan offers niche opportunities for specialist investors rather than index investing.
• Gilmour is an investment analyst.
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