Ny Times On Lessons From Japan

[richc]

Interesting article on the impact of deflation in Japan over the past 20 years -- makes for some pretty grim reading.

I particularly liked this bit (is this the solution to housing costs in London?) --

Scaled-Back Ambitions

The downsizing of Japan’s ambitions can be seen on the streets of Tokyo, where concrete “microhouses” have become popular among younger Japanese who cannot afford even the famously cramped housing of their parents, or lack the job security to take out a traditional multidecade loan.

These matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.

“This is how to own a house even when you are uneasy about the future,” said Kimiyo Kondo, general manager at Zaus, a Tokyo-based company that builds microhouses.

http://www.nytimes.com/2010/10/17/world/asia/17japan.html

What articles like this don't really question is how exactly was a low wage earner taking out a $500,000 mortgage 20 years ago in Japan supposed to pay it off? The initial mortgage assumed a level of future inflation that was completely inconsistent with the stated goals of the central bank. No wonder it all came crashing down.

[aa3]

Great article. This is what long term deflation looks like.. its not the utopia for young adults as some on this board imagine. Everyone just gets even tighter with their money and it gets harder and harder to make any money.

All Japan had to do was print and have the government spend the money wildly until the deflation cycle was broken.. but culturally the Japanese are very against giving people money for work not done. So they've never been willing to do it.

[silver surfer]

The UK isn't Japan (for one thing our population isn't ageing and declining anywhere near as fast as theirs), but the more Poundland grows the closer we get!

The biggest lesson we should take out of this regarding house prices is that I fully expect to see UK house prices decline, but at the same time owner occupancy rates will also decline from the current 70%+ to the 50-60% that we see in France and Germany. In other words housing will get cheaper, but because of tighter credit it will still remain tantalisingly out of reach for many FTB's.

[Guest_ringledman_*]

Japan 1990 - Blue chip Stocks on Price to earnings of 100 times. Tokyo palace worth more than Manhattan. Huge saving nation. Huge producing nation. Huge trade surplus. Currency rose in the 100 percents v other currencies over the past decades.

Result = Deflation.

UK 2010 - Blue chip stocks on price to earnings of 7-14 times. Property in London expensive but not that much more than other major centres - HK, NY, (when based on foreign currency purchasers). Huge spending nation. Huge trade deficit. Currency fallen 30%+ v other currencies.

Result = Inflation.

Simple really. Go with the fundamentals not the spin of deflationists on here or in the mainstream press.

Edited October 17, 2010 by ringledman

[interestrateripoff]

http://images.businessweek.com/ss/07/03/0314_microhomes/index_01.htm

Some interesting images here.

Looks exciting this is what our children can look forward to being able to afford? Nice, parties would certainly be an intimate experience.

http://www.businessweek.com/globalbiz/content/mar2007/gb20070313_145902.htm

One home design is called unagi (as in "eel") that works on long but narrow strips of land. Another is called kado (or "corner") for a triangular and small plot. The price of Commdesign homes ranges from $171,000 to $214,000. (Those who need to buy land, however, will need to spend two or even three times as much above the cost of home construction.)

Securing affordable housing likely will remain a colossal headache in Tokyo, but micro-homes are an option for those willing to sacrifice space for the convenience and amenities of city life. "Compact houses can meet people's fundamental living needs," says architect Kurosaki. It may not be for everyone, but plenty of younger Japanese seem to be warming up to the idea.

http://bionicbong.com/japan/lifeinjapan/microhouses-japan-creative-living-dream-houses-tokyo/

[OnlyMe]

Great article. This is what long term deflation looks like.. its not the utopia for young adults as some on this board imagine.

What is going on there is nothing to do with deflation and everything to do with ZIRP, artificially propping Japan's housing bubble, which still now is pricing out sensible pruchase/ownership/rentals.

It is what you get when you are so hell bent on preserving your banking system form the effects of bad loans to the cost of everything else. Get their industries are suffering too as a result. They were very lucky that their initial burst happened dureing a period when the rest of the world borrowed and spent like lunatics.

If the young are nervous about the future they are rightly so, the lead weight round their necks will likely sink their employment prospects some time over their lifetime at least once if not multiple times.

China alone has enough population resources to absorb most of the jobs other countries deicde they no longer want on econmic grounds to keep this assinine ponzi scheme going.

[Errol]

All Japan had to do was print

lol. Yes, the obvious solution! All economic ideas can simply be replaced by the 'printy printy' mantra. Zimbabwe is truly the seat of all economic knowledge.

[DeepLurker]

Great article. This is what long term deflation looks like.. its not the utopia for young adults as some on this board imagine. Everyone just gets even tighter with their money and it gets harder and harder to make any money.

All Japan had to do was print and have the government spend the money wildly until the deflation cycle was broken.. but culturally the Japanese are very against giving people money for work not done. So they've never been willing to do it.

Why blame all of Japan's problems on deflation?

I can think of any number of reasons as to why Japan is in the poo:

• The state spending money that it doesn't have on white elephants for the last several decades.

• A massive hangover due to an incredible real-estate bubble (the royal palace valued at more than California!).

• Loss of consumer confidence caused by the end of the fabled "jobs for life", which in turn reduces long-term investments as people don't plan far ahead.

Surely the above - along with heaps of other issues - are also factors in the economic turmoil affecting Japan?

Blaming everything on just "deflation" is a sign of naivety IMO.

[SHERWICK]

A very good article. I particularly liked this bit "The decline has been painful for the Japanese, with companies and individuals like Masato having lost the equivalent of trillions of dollars in the stock market, which is now just a quarter of its value in 1989, and in real estate, where the average price of a home is the same as it was in 1983. And the future looks even bleaker, as Japan faces the world’s largest government debt — around 200 percent of gross domestic product — a shrinking population and rising rates of poverty and suicide."

[Snugglybear]

The Yanks only think this is news because of the usual size of their houses.

With our wonderful starter homes and luxury open-plan-living flats apartments, the UK is already nearly there.

Look at the CABE survey from 2009.

[Ruffneck]

so the price of one of those commdesign homes is 170-210,000 and house prices are at the same level as 1983.

Well they're still way overpriced on those terms...

Any comparisons possible between Japan 1990 and China 2010?

Edited October 17, 2010 by Ruffneck

[SHERWICK]

Any comparisons possible between Japan 1990 and China 2010?

Yes. China 2010 is just starting out, whereas Japan 1990 was just finishing.

[gravity always wins]

Great article. This is what long term deflation looks like.. its not the utopia for young adults as some on this board imagine. Everyone just gets even tighter with their money and it gets harder and harder to make any money.

All Japan had to do was print and have the government spend the money wildly until the deflation cycle was broken.. but culturally the Japanese are very against giving people money for work not done. So they've never been willing to do it.

Japan has never suffered from deflation.

Disinflation yes, deflation no.

The Yen has devalued substantially against gold since 2000 same as all other fiat currencies that is not deflation its the evidence of another fiat currency being flushed down the toilet.

[Errol]

The Yen has devalued substantially against gold since 2000 same as all other fiat currencies that is not deflation its the evidence of another fiat currency being flushed down the toilet.

[gravity always wins]

Nice chart thanks for that do you have the Japanese RPI and CPI equiv charts?

I thought I had them but can't find them. I am sure they show that in the last twenty years prices have almost never stopped rising in deflationary Japan.

[Sour Mash]

Great article. This is what long term deflation looks like.. its not the utopia for young adults as some on this board imagine. Everyone just gets even tighter with their money and it gets harder and harder to make any money.

All Japan had to do was print and have the government spend the money wildly until the deflation cycle was broken.. but culturally the Japanese are very against giving people money for work not done. So they've never been willing to do it.

You can't print real capital. All you can do is increase the amount of currency units and cause monetary inflation to bail out the debtors by stealing from creditors. Japan's earlier 'prosperity' was based on the unsustainable model of borrowing productive capital from their future and pumping it into their (at the time) present day economy... they reached the point where they couldn't borrow any more and are now suffering the loss of the borrowed future productivity.

We have been doing the same thing - basing an economy on borrowing from our future selves and spending all the money in the present day timeframe. Of course like them we have been 'prosperous' - any idiot would be 'rich' if they borrowed 5 years worth of future wages and spent it in a year.

We can either face the consequences with a relatively short, nasty and painful correction .. do what the Japanese have done and try to prevent the rich and powerful players from collapsing and induce a decade(s) long recession .. or go totally over the top and flood the economy with freshly created currency and trigger out of control inflation.

[homeless]

these microhouses seem pretty ok to me. And i guess anyone else in the uk that has spent time living in bedsits. They are realy some kind of fancy yuppie trendy house, not realy indicative of true living and certainly not true of what your average hence poor person could afford.

There is a million and more bedsits/ caravans/ rooms/ b&b accomadations in the uk that are much smaller than these and instead of fancy wooden floors and contempary designed lighting and beds are more 25 year old wrinkled carpets, sinks beside your bed and curtains that aint seen a dry clean in 40 years.

I wish they would stop calling people that can only afford $500k usd city centre cramped apartments poor

[gravity always wins]

these microhouses seem pretty ok to me.

They look perfectly functional to a minimalist like me.

"A House is a machine for living in."-Le Corbusier

[rantnrave]

Having lived in Tokyo for a couple of years, I can highlight at least one reason why such small accommodation is more accepted over there - Japanese people do not entertain one another in their homes. The cost of eating out is far far cheaper over there than here. I used to eat out three times a week there, which I would never ever do here. It was good quality too. When I wanted to meet friends, we would just agree on a restaurant beforehand and staying there for two hours was completely acceptable. Most places had all you could drink deals and tipping is culturally offensive. Despite having several good Japanese friends, I was never invited to their homes. The only people in Tokyo who visit each other's homes are foreigners. Thus, if you're not cooking for guests, you don't need a bigger dining room or kitchen etc.

I actually prefer the Japanese way of socialising if I'm honest. I'm not a great cook and meeting people didn't involve me having to tidy my apartment first. Of course, the weather there is much more co-operative for such a lifestyle (they get as much rain as we do, but mostly concentrated in five to six weeks of rainy season). The streets are also, needless to say, much safer and 'attitude' free.

[Mikhail Liebenstein]

Great article.  This is what long term deflation looks like.. its not the utopia for young adults as some on this board imagine.  Everyone just gets even tighter with their money and it gets harder and harder to make any money.

All Japan had to do was print and have the government spend the money wildly until the deflation cycle was broken.. but culturally the Japanese are very against giving people money for work not done.  So they've never been willing to do it.

In the UK it seems we don't give money for work, just for work not done.

It's clear the parasitic bankers and politicians have a negative effect on wealth and GDP, which is presumably why they are rewarded.  The unemployed also seem to gain handsomely.

Its the inversion of the so called  protestant work ethic.

[aa3]

Why blame all of Japan's problems on deflation?

I can think of any number of reasons as to why Japan is in the poo:

• The state spending money that it doesn't have on white elephants for the last several decades.

• A massive hangover due to an incredible real-estate bubble (the royal palace valued at more than California!).

• Loss of consumer confidence caused by the end of the fabled "jobs for life", which in turn reduces long-term investments as people don't plan far ahead.

Surely the above - along with heaps of other issues - are also factors in the economic turmoil affecting Japan?

Blaming everything on just "deflation" is a sign of naivety IMO.

Without the good jobs for life and the confidence in future income, and a strong income in the present, the state has to step in and get money into the hands of consumers. Increasing savings is a rational response to job and business insecurity. Yet with lilttle confidence in future consumption there is few investment opportunities. Hence 0% return on savings.

That is why the state has to flood the country with terrifying amount of cash, so there is never any doubt that in the future a person can easily make money. And investors can have confidence to invest knowing the demand is going to be even bigger years from now.

When those investors step in with big investments, that in itself picks up millions of people in good jobs building those things.

Edited October 17, 2010 by aa3

[aa3]

In the UK it seems we don't give money for work, just for work not done.

It's clear the parasitic bankers and politicians have a negative effect on wealth and GDP, which is presumably why they are rewarded.  The unemployed also seem to gain handsomely.

Its the inversion of the so called  protestant work ethic.

Good point we actually seem to be taking it the other way. The most admired ways to make money are things like real estate speculation, BTL, stock ownership, being a partner in a firm and having other people do the work, etc..

We also have so little respect for work that millions who work full time are paid less than someone on subsistence benefits gets.

[wonderpup]

Many economists remain confident that the United States will avoid the stagnation of Japan, largely because of the greater responsiveness of the American political system and Americans’ greater tolerance for capitalism’s creative destruction.

This is irony right? Or did these 'economists' sleep through the biggest bank bailout in history?

There seems to be this massive disconnect between the reality of america and the delusional fantasy version it's population maps onto it.

[mirage]

Without the good jobs for life and the confidence in future income, and a strong income in the present, the state has to step in and get money into the hands of consumers.

Does it? By creating obligations on future earnings for these same people?

Increasing savings is a rational response to job and business insecurity. Yet with lilttle confidence in future consumption there is few investment opportunities. Hence 0% return on savings.

But that's a real return if there really is deflation.

That is why the state has to flood the country with terrifying amount of cash, so there is never any doubt that in the future a person can easily make money. And investors can have confidence to invest knowing the demand is going to be even bigger years from now.

Please describe how flooding the country with terrifying amounts of printed cash should lead to the rational expectation of long term real returns. Please explain how f@cking about with the price signals to that extent leads to a transparent investment environment with no significant unintended consequences and the rational expectation of strong real returns.

Secondly, please outline the evidence that massive money printing actually does tend to increase long-term wealth-building investment.

Please explain how investment projects planned in an environment of free money for consumers will pan out when that free money hose is turned off. How do we know that enterprise that is successful in one environment (free money) is going to fare in another (the real world where money is extremely hard-won). What is the opportunity cost of investing for one enviroment when another supervenes? What is the cost in terms of investment visibility when the entire direction of macroeconomic conditions depends on the whim of policy?

Please explain how speculative bubble formation is not in fact a problem in rampant money printing experiments.

If you can't in face explain all these things, will quantitative models that, of course, are able to predict the current situation in back-testing - then what on earth do you think you are doing recommending such drastic experimental action?

[aa3]

Does it? By creating obligations on future earnings for these same people?

That is only really true if borrowing from foreigners. Which I am strongly against. And its definately not true when printing money.

But that's a real return if there really is deflation.

True, its oen of the issues with the zero bound.

Please describe how flooding the country with terrifying amounts of printed cash should lead to the rational expectation of long term real returns. Please explain how f@cking about with the price signals to that extent leads to a transparent investment environment with no significant unintended consequences and the rational expectation of strong real returns.

Secondly, please outline the evidence that massive money printing actually does tend to increase long-term wealth-building investment.

Please explain how investment projects planned in an environment of free money for consumers will pan out when that free money hose is turned off. How do we know that enterprise that is successful in one environment (free money) is going to fare in another (the real world where money is extremely hard-won). What is the opportunity cost of investing for one enviroment when another supervenes? What is the cost in terms of investment visibility when the entire direction of macroeconomic conditions depends on the whim of policy?

Please explain how speculative bubble formation is not in fact a problem in rampant money printing experiments.

If you can't in face explain all these things, will quantitative models that, of course, are able to predict the current situation in back-testing - then what on earth do you think you are doing recommending such drastic experimental action?

I think you hit on another of true points. One time stimulus while helpful, are not anywhere near as powerful as long term commitments to flood the country with money. In the one time stimulus investors make some money once, but do not want to make further investments because they have no clue whether another stimulus will come. In the long run I believe in a citizen's dividend, that rises to fill whatever output gap exists. A trust has to be built up that the state will literally do whatever it takes to make sure consumption keeps up with productive expansion.

There are examples where printing and borrowing worked very well. In WW2, America ran a budget deficit of 30% of GDP for 5 years straight. Along with serious printing of money, that went even into the 1950's.

Businesses hugely expanded to get a piece of all this demand that all this money flowing around created. So there was no inflation, because although money supply was increasing, so was productive capacity. And in the first years simply bringing back online capacity and labour that was idled from the great depression.