After delivering record growth for decades, the financial industry has turned into a giant wealth destruction machine. Total losses already equal global GDP, and that is before taking into account the coming declines in real estate values. If Japan’s deflation rot — wealth destruction was three times GDP — is anything to go by, more pain is in store for all of us. But a couple of Japanese lessons should help us find a perspective.

Let’s start with macroeconomics, which really means national savings and investments. When the Bubble burst in 1991-92, Mr. & Mrs. Watanabe were saving about 15% of their annual income. This served as a huge buffer during the economic hard times. So while bonuses were slashed and the unemployment rate tripled to over 6%, the Watanabes used savings to maintain their quality of life.

We used to joke about Japan’s “golden recession.” Yes, times were tough, and the kids had to scrape by with part-time jobs while their parents worried about mortgage payments. But the buffer in Japan was so large that Louis Vuitton sales never once dropped.

All this contrasts with America. At the start of the U.S. bubble collapse last year, American households basically had no savings. Unlike Japan, the rise in U.S. unemployment is poised to directly pull down consumer spending. Add mortgages and credit card debt that now must be paid back out of shrinking paychecks, and you’re left with a very sharp contraction in consumption. For an economist this is simply a normalization of spending patterns. In the real world, it is a deep recession. Frugal America here we come.

Lesson number two from Japan’s focus on money and credit. No, it is not about accounting rules and capital adequacy, but human psychology and interaction: trust and “animal spirits” are the very foundation of the financial system.

Until about a year ago, anyone could get a loan, few questions asked. From last summer, all had changed. After Lehman was allowed to go belly-up, the elite banks stopped lending to each other not because the regulations had changed, but because they did not trust each other anymore. The risk of the next bankruptcy seemed too large. And when bankers won’t lend to each other, they sure won’t lend to anyone else. Credit crunch.

To restore trust, central banks stepped in to underwrite loans, and money flows began to ease up a bit. But while this action helped revive some parts of money circulation, nobody is prepared to borrow more than the bare minimum. That is because the animal spirits of risk-taking and entrepreneurship have been killed off. Trust is a necessary condition, but not sufficient to get new loan growth, new credit growth, new wealth creation. For that we need people wanting to invest in a better future because they believe they can create one.

Here, the Japanese government actually did a good job throughout the ’90s. Industrial policy was high on the agenda, and with every stimulus package Japan presented, we got lists of six or seven industries and sectors that the government encouraged entrepreneurs to invest in. From nano-technology to nursing homes, from biotechnology to affordable condominiums, all the way down to taxis and cockroaches.

Yes, cockroaches: as part of then-PM Obuchi’s economic package, we got “gokiburi taisaku,” where restaurant owners were encouraged to take out a loan and invest in a new kitchen to improve restaurant health standards and, well, drive out the little pests.

Total demand created by the “gokiburi taisaku” came to almost 1 trillion yen. Sure, I and many other analysts laughed at the time and thought little of this. But the fact that the Japanese government did not just hand out freebies, and actually created incentives for private entrepreneurs to reinvest in their business — that is what helped boost demand. Through policy, the government can summon animal spirits.

All over the world, governments are going to become more interventionist. So far, this has primarily been defensive, helping to restore trust among bankers and reduce fear among the people. The start of an offensive strategy — where the government encourages private risk taking and entrepreneurship — will be the key to the next economic growth cycle. The next bull market will start when it becomes clear that the private animal spirits are back and the government begins to move out of the way again to let private entrepreneurs take over.]

That is the final lesson. Japan clearly failed to create a self-sustaining growth cycle because the government, although good at promoting new entrepreneurship, never moves out of the way once the seeds of private growth have been sown.

This is where Japan still has a lot to learn from the U.S.

Jesper Koll is an economist, investor and CEO of Tantallon Research Japan.

This commentary originally appeared in Metropolis magazine (www.metropolis.co.jp).

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Latest 15 of 25 Total Comments Show All

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  BlackFlag at 02:41 AM JST - 14th December

  If you're a Lefty and one of these anti-globalization dingbats opposed to free markets and to the entrepreneurial spirit that has made America the most powerful nation in history just let me say:Your i-pod defeats any argument you try to come here with.

  why are 'leftys' such a sore spot with you? jealous? made your choices and now locked into a dead end? do you understand that entrepreneurism and globalization are total opposites in the world today? no, probably not. America the most powerful nation in history? hahahaha, how far back does your history go? anno domini ipod?

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  zurcronium at 07:05 AM JST - 14th December

  its truly amazing that the ipod stands to magically erase the republican $700 billion plus government bailout of all segments of the failed free market financial industry in the US.

  Oh to be five again.

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  mareo2 at 09:05 AM JST - 14th December

  A few opinions that I readed or heard from employes inside the companies and buyers on the streets. The J market is so protected that the diference in quality betwen the same products for export and for domestic consuption is noticeable. The high protectionism, make the same company very competitive abroad but non competitive in J.

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  Number11 at 10:31 AM JST - 14th December

  I disagree completely with this. This is typical, self-serving nonsense that I am tired of reading. The great failure of the Internet is that we're all being subjected to constant, never-ending advertising and agenda-based crap masquerading as serious commentary or "news."

  Japan has little to learn from the US. The population of Japan has increased less than 0.1% per year in a non war-based economy. Japan has no more government intervention in the market, or less private entrepreneurship, than the US. The US is simply a "velvet" fascism, with the population deluding itself that it is free and part of a free market.

  Across every industry sector, city, state, county and federal laws, regulations, zoning boards, elected and appointed people twist and manipulate the US market with more disincentives, incentives, monopolies and skulduggery than any other nation on earth. The public relations is just better at masking it.

  Japan and the US have absolutely nothing in common -- the geography, resources, culture, system of government, history and sensibilities are different.

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  Sarge at 12:37 PM JST - 14th December

  "its truly amazing that the ipod stands to magically erase the republican $700 billion plus government bailout..."

  Who said that?

  "America the most powerful nation in history? hahahaha"

  Some people will deny anything.

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  BlackFlag at 12:50 PM JST - 14th December

  Sarge, you don't read history either eh?

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  BlackFlag at 12:57 PM JST - 14th December

  besides Saudi Arabia is far more powerful than the USofA in this day and age. they have you quite literally over a barrel.

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  Sarge at 01:00 PM JST - 14th December

  "Saudi Arabia is far more powerful than the USofA"

  Har!

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  jeancolmar at 07:57 PM JST - 14th December

  The more I reread this article the more I think it is not only crud, but typically dangerous CEO crud. The passive voice begins to tell us that the money making system is now a money losing system. It ends with rubbish about bad, bad, bad government intervention and an amazing load about Japan learning from America. Tossed in between is the weasel word "free markets." Nothing about how this mess came about, of course, It just happened because folks stopped trusting each other? Bad vibs?

  Hey, does this guy, this CEO, know what day it is? The American banks would have been belly up were it not for government intervention. Free market George Bush is trying to scrounge up taxpayer money the American auto industry.

  "Free markets" for laissez-faire capitalism (the old euphemism for unregulated and destructive greed) is like "The Free Enterprise System" as a euphemism for capitalism. Euphemisms are used to to hide something that stinks. Capitalism, especially the unregulated kind, stinks of ruined lives for the sake profits for the undeserving few. These days it stinks of dry rot. The truth is that capitalists love "free markets" for as long as they suit them. Their goal is to kill the competition and get monopoly power.

  The myth is that Socialists are star-eyed unrealistic idealists and people like CEOs soaked in the economics of Milton Friedman are the hard-nosed realists. But at times like this the truth comes out: it is exactly the other way around.

  But you don't have to read Marx to know that because capitalism runs on greed it also runs in manic-depressive cycles. There is the period of drunken economic hubris and then there is the hangover, as is the case now, with the state dispensing economic painkillers and Prozac. And the stupid, self-deluded and overpaid CEOs still do not know what day this is because they are insulated from everyday reality by a high and thick wall made out of money and perks.

  Welcome to the US auto industry which got virtual monopoly power by killing off the America's public transportation infrastructure. In most places in America your only practical alternative to driving a car is walking. Generations of CEOs have comfortably lived with their heads stuck in the 1950s. Neither the wave of imported European cars nor the more powerful wave of Japanese auto imports woke them up to the need to build cars that weren't junk and service that did not suck big time.

  I love this from our silly CEO: "The next bull market will start when it becomes clear that the private animal spirits are back and the government begins to move out of the way again to let private entrepreneurs take over.]" The Next bull market?! I had to read that a few times to believe he really said it. The next round of unregulated reckless greed with things as destructive as "sub-prime" (i.e. bad) loans when the system hasn't seen the worst of the last "bull market"? Like the auto CEOs who flew into Washington to beg the government for handouts, this guy really and truly does not know what day this is.

  I love the word "entrepreneurs," another euphemism taken from the French. This can mean anything from a kid with a lemonade stand to a mindlessly greedy robber baron. But I'll tell you, CEOs are not entrepreneurs in the way the hippy-geek hobbists who started Apple Computers were. They are time servers who must invent ways to bloat profits to keep the stockholders happy. They invent nothing and know nothing of production and what goes on on the shop floor.

  Right, the next bull market: where government (as it were) withers away after having pumped trillions of dollars into failing industries and into the pockets of CEOs--don't you just love it?

  You know what Marx said? He said capitalism contains the seeds of its own destruction. He also said that was a good thing because it would make way for socialism. Now I'll confess that when I see the stuff of bull sessions happening before my eyes--when suppressed economic theory becomes everyday news--I really and truly don't want it to happen--not just yet, anyway, without a Hollywood ending of socialism gliding in to save the day. (And I mean democratic socialism with workplace democracy, production for use and other good stuff.) That is one big reason I don't care for CEO-speak like this article. It is part of the problem that is going to make The Worst That Is Yet To Come even worse.

  Marx said something else. He said that it is people's consciences that make history but history that makes people's consciences. You see where his head was at he said this. One day Bush is a disciple of Milton Friedman, the next he is a Keynesian.

  I have an investment tip: be sure your broker is a Marxist. He or she may seem like a wet blanket but will have no illusions about the system.

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  Crokk at 08:21 PM JST - 14th December

  Well, only thing that Japan should learn from USA is how NOT do economics, creating just a big bubble (sorry, but how it ended it looked like a stinky fat bubble that sadly exploded).

  And I agree with Number11 when he says "Japan and the US have absolutely nothing in common -- the geography, resources, culture, system of government, history and sensibilities are different."

  Back on topic... I can't understand the writer, in my (ignorant) point of view the fact that Watanabe's family had savings so they could afford the crisis (compared to american) it wasn't bad... same for the rest of the article, but maybe my english fails...

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  jeancolmar at 10:58 PM JST - 14th December

  Actually, the Mr and Mrs Watanabe business does not make much sense. Were they amoungst the unemployed? Their saving would have gone if the unemployment persisted to any great length. What their actually state was is not said. They are supposed to represent average Japanese, but how?

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  zzonkerr at 11:34 PM JST - 14th December

  Sarge - *"Saudi Arabia is far more powerful than the USofA"

  Har! *

  Ummmm, living life through your red, white and blue-colored glasses has rendered you incapable of reality. As much as it pains me to say this, BlackFlag does have a point.

  Black was not referring to classical power, such as derived from the military. I think he's referring to economic power. Follow the money trail.

  Consider two points: 1) During the oil price spike earlier this year, where do you think our money went? You think that when your friends Stateside paid $4/gal that the money stayed in the US? Nope.

  2) Where did the Saudi money go during the summer and autumn? It wasn't in US banks and institutions. It was moved to Dubai. Why do you think things collapsed so quickly? Because Saudi money was no longer there.

  Look at life outside your chevrons, man. The US may be a military power and we will always be an economic power, but until we shake our oil dependencies, the Saudis have us by the short hairs.

  • Z

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  bdiego at 03:49 PM JST - 16th December

  Japan Today should have more articles based on humor and folly, less articles trying to interpret facts and policy like this.

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  VoXman at 02:10 PM JST - 17th December

  The demise of the US and the free market economy! Premier Khrushchev said. We will bury you. The US buried the USSR. Japan Inc in the 1980's at their peak blasted US Newspapers that soon they'd buy all of America and all American's would be working for the Japanese. Bubble deflated. The point is that there will always be the "Number11's" of world proselytizing the evils of the US and it’s so called over-rated way of life. And the poor misunderstood Japanese. You are right Number 11 in that the US economy and Japan’s are entirely different. The Japanese are the premier manufacturers and the world certainly needs to learn from them. But naysayers plot the end of the US and its dominance; there is somebody in a garage or lab somewhere in the USA coming up with the next big thing like the PC, or the iPod. And when it happens the number11’s of the world will shut up for a few years and wait for the US to stumble again, then pop up like some know it all professor and recycle the same dribble he is today……. Thanks for the laugh.

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  Yelnats at 03:49 PM JST - 17th December

  I remember the bubble economy. I bought a mansion for 4500 man en and still owe 3500man en and I couldn`t get that fro it even if I tried. Got screwed on writing off the percent on the loan too. I knnow now what they mean by asking you to bend over here when you first arrive and customs people are holding huge white daikon radishes.

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