Downturn lessons from 1990s Japan

What can the economic turmoil suffered by Japan in the early 1990s teach us about our current predicament?

Last Updated: 09 Oct 2013

In the early 1990s, Japan was beset with economic and social woes. What are the parallels with our current predicament, and what can be learned from the Japanese experience? Report by John McLaren, who witnessed the country's turmoil at first hand (with case studies by Emma De Vita).

From the chilling moment it dawned on us that we'd been crunched, economic commentators have tried desperately to work out which past bust offers the best parallel to our unfolding predicament, and therefore the best guide to what happens next. Some of the early precedents - the aftermath of 9/11, the collapse, even the more serious troughs from the 1970s through to the '90s - already look like minor blips compared with our big one.

It's a bit like politicians in 1914 trying to gauge the risks of entering the first world war based on a P&L analysis of the Charge of the Light Brigade. As for similarities with the Great Depression, it's hard to visualise advanced economies today falling into Steinbeck or Orwell country.

So, virtually the only candidate left standing is the Japanese boom-and-bust of the late '80s and early '90s. This debacle does get discussed, but usually only as an example of how central banks and governments can cock things up. The then governor of the Bank of Japan, Yasushi Mieno, stands convicted of bursting the bubble by foolishly hiking interest rates to restrain asset prices, and then failing to bring them back down fast enough. Others in the dock include ministry of finance officials who were slow to encourage banks to write off bad debts, and captains of industry, who failed to wield a timely samurai sword to their employee rosters when profits nosedived. The implication seems to be that if all these people had been quicker and smarter, the Japanese would have glided on effortlessly with ever-growing prosperity, and that its 'lost decade' was merely the result of tardiness and mismanagement.

I wouldn't claim to be an expert on Japan, but I did live there over two spells, for a total of eight years, working first as a diplomat and later running an investment bank's Tokyo office. I had a ringside seat for the building - if not the bursting - of the bubble. The Japanese had an awful lot going for them then. They were highly educated, diligent, enjoyed harmonious labour relations and their manufacturing processes were the envy of the world. Their lengthy decision-making methods were no handicap in an era when long-term planning was essential.

The world both admired and felt threatened by Japan. A combination of thoroughly supportive banks and inexorably rising share prices meant there was almost no limit to their companies' ability to raise cash for investment. During the '80s, the Nikkei Index rose from under 7,000 to almost 39,000, so that by 1989 Japanese stocks accounted for a dizzy 42% of global capitalisation. Long before Porsche, many Japanese manufacturers concluded that speculating on financial derivates was easier than making things, and more than half their profits came from what they labelled zaitech (a play on zai - the Chinese character for finance - and 'hi-tech'). Naturally, banks were pleased to lend them the stake money for this exotic casino.

Meanwhile, real estate was skyrocketing: the aggregate value of property in Japan rose in value to four times that of the US, and the few hectares of the Imperial Palace alone was worth the same as Canada. By the late '80s, prime residential property in Tokyo was going up so rapidly it was almost impossible for agents to price it. Anyone who said this was nuts was drowned out by those who argued that the shortage of quality space and the city's unstoppable rise as a leading financial centre meant prices would rise indefinitely (sound familiar, Mr Foxton?).

But how did this all feel for ordinary Japanese? A good proportion benefited, and not only from steadily rising salaries: Japanese stockbrokers went door-to-door hawking shares and, with everything going north, even the least sophisticated housewife (usually the family purse-holder) made money.

Such was the increase in wealth that most of the population combined a savings ratio that was high by international standards with a formidable and consistent pattern of consumption. Everyone I knew bought the latest TV, camera and hi-fi, which was great for Sony, Panasonic and Canon. The pattern of new-car buying was even more entrenched. The Japanese have a diabolical type of MOT called shaken (and you would be shaken if you knew how much it cost), which then was mandatory when a car was two years old. As a result, all who could afford it traded in their car every 729 days. This, coupled with a fierce national and marque loyalty, meant that Toyota, Nissan and Honda could predict their sales with extraordinary precision.

As the comfortable prosperity of the early '80s gave way to the overflowing riches of the second half of the decade, consumers' desires could no longer be fulfilled exclusively by domestic products, and although they still avoided anything foreign if it needed to be dependable - like cars or electrical goods - they thought we could be trusted to make handbags, perfumes and silk scarves. They began acquiring luxury, branded goods with such a passion that Japanese tourists rampaging up Bond Street, Rue du Faubourg St Honore or Via Condotti had to be rationed.

And then the bubble burst. During 1990, the Nikkei nearly halved, beginning a long collapse that consigned zaitech to an early grave (today the index stands at around a fifth of its peak). By 1992, the banks already had more than $400bn in non-performing loans. Real estate declined for a decade, falling by an average of two-thirds, with the top-drawer stuff in Tokyo shedding 90%, peak to trough. Pay increases and bonuses soon became a thing of the past, but the lifetime employment system was deeply rooted and most workers held on to their jobs.

And their consumption pattern basically just stopped. Many Japanese quietly decided that, since last year's camera, TV and microwave were working just fine, they wouldn't replace them, and grudgingly stumped up for the shaken rather than shelling out more for new wheels. There were three reasons for this. First, they had been bitten badly by the equity and real-estate markets and were in no hurry to trust government or financial institutions again. Second, once they got used to not having the latest gadget, they realised they could survive for years without more.

Third, the Japanese people must be among the least personally avaricious folk in the world, and although they were briefly seduced by a bit of bling, it went fundamentally against the grain. Austerity was not so much forced upon them as embraced by them. For those of middle age and upwards at least (the groups with the highest spending power), the 'back to basics' mood carried a welcome whiff of nostalgia.

Economists and politicians initially assumed that this was merely consumption delayed, and that as soon as interest rates fell and the worst of the anxiety evaporated, the population would resume its free-spending ways. It never fully did, and it resolutely ignored the government's 10 fiscal stimulus packages totalling $100bn. During the '90s, the domestic car market shrank by 25%, forcing Nissan into the arms of Renault and putting all the makers other than Toyota under severe pressure. Having lost both confidence and the unique advantage of such a buoyant domestic market, companies like Sony lost their way. Sales of luxury goods crashed, and the new mood nourished simple value-proposition outfits like Muji, which means 'no brand' and, ironically, has become one.

Of course, as new generations came through, they wanted nice things, and as a rather anaemic - and now stalled - recovery evidenced itself in 2003-07, Japanese consumption of luxury brands returned, but people weren't squeamish about buying them in discount outlets. Meanwhile, in the high street, the leading clothing brand had become Uniqlo, a Gap lookalike that wouldn't have stood a chance in the '80s.

And what became of Japan in macro terms, apart from the infamous price deflation? The '90s was a game of snakes and ladders. The big ladder was the huge boost the Japanese got from the emergence of China, a neighbour that terrified them as much as it enriched them as an export destination. The snakes were the development of sectors like software and the internet, where knowledge and language were vital, where Japanese manufacturing expertise was irrelevant and agility was all. Their ponderous decision-making quickly became an Achilles heel.

But wider factors were at play: all those years of easy finance and limited competition had ramped up Japan's growth unsustainably. The strength of the yen, a high cost-base and intensifying competition meant opportunities for export were limited. Having overshot, the Japanese were fated to languish for a decade before they had a chance of resuming a more sustainable growth path (and with negative growth in prospect for 2009-10, the pain has returned). However, the country didn't fall apart and it remains one of the most stable and civilised places on earth.

It is not inconceivable that the UK will go the same way as Japan. If we had not experienced years of easy credit and a runaway housing market, our cumulative GDP growth would have been significantly lower. In theory at least, we now have a choice - either a) insist that levels of economic performance from earlier this decade are sustainable, try to prop up consumption and asset prices (with the risk of apocalypse if it doesn't work), or b) allow voluntary and involuntary de-leveraging to happen, accepting this may lead to several years of negative or negligible growth.

I suspect the choice doesn't exist because, as Japan found, you can do what you like with interest rates and policy, but you can't make people spend. Even if it doesn't show up yet in the official data, many people in the UK are already taking action. Expensive cars are not being ordered, exotic holidays are being cancelled, and children are being taken out of private education. This recession is not going to turn round in a hurry. People are frightened: pensions and savings are down the drain, the ATM that was their equity-rich house has developed a severe and possibly terminal malfunction, and they worry about their jobs.

And, as was the case for the Japanese, this isn't only about fear. I bet you have one or more cars that work fine, several TV sets, thousands of quids' worth of perfectly serviceable electronics, not to mention bulging wardrobes. Taking a credit-card sabbatical won't hurt so much. Thirty or 40 years ago, the British didn't prize possessions and money above all else. In recent decades, though, we've morphed into mini-me Americans, and how much you make is our only way of keeping score.

But I have a hunch we haven't been 100% comfortable in this skin. For those who lose their jobs or their houses, the aftermath of the recession could be ghastly. But for the rest, a little austerity, although a bit depressing, may also be strangely palate-cleansing. Just ask the Japanese.


If the Japanese boom of the late '80s had to be summed up by one outrageously expensive item, then it has to be the Yen10,000 (£100) melon. Conspicuous consumers thought nothing of buying the early-season fruit as a gift for the summer Obon festival, but what made Robert White - then an ex-pat on a two-year business mission in Tokyo - choke was the £60 price tag on a boxed pair of tins of Fray Bentos corned beef. 'I knew beef commanded a premium in Japan, but this was absurd,' he laughs. Kobe beef this was not.

White, now a partner at wealth manager Oldfields, lived in Tokyo from 1985 to 1987, there to set up SG Warburg's investment management office. 'The stock market was going crazy and there was an extraordinary display of wealth,' he recalls. 'People went out a lot, spent money and ate at expensive restaurants.' He returned to the UK in 1988, and by the time he went back to Tokyo three years later to start up Invesco's asset management division, Japan's bubble had burst.

'People were very shocked by how quickly everything had broken down, the stock market particularly,' says White. For the Japanese, shock turned to disbelief as the markets plunged. 'It's a bit like somebody dying. They die, you know they're dead but it takes you several years to realise they are not going to be coming through the door again. It took people a long time to realise the stock market wasn't going to go up again and that they had to cut their coat according to their cloth. People were very distrustful of financial institutions.'

It took half a decade for the Japanese to finally come to terms with what had happened. The confidence that came with being on top of the world was a hard feeling to quash, and things have never returned to what they were before the crash. Says White: 'People were laid off, and a lot of my Japanese friends with children who were graduating found that they couldn't get jobs, no matter how well qualified they were.'

Unlike the UK, the damage caused by the implosion of the property market was limited, but the crash affected many businesses, with some workers pushed into part-time or temporary contracts. The job for life was finished, and so was the conspicuous consumerism that the Japanese had embraced.

'The one thing that definitely changed was that no self-respecting Japanese person would buy something second-hand before the bust. They wanted the best and the newest,' says White. Post-boom, secondhand bookshops and Yen100 shops (£1 shops) mushroomed.

White believes that the similarities between what happened in Japan and what's happening in the UK are striking. 'The big lesson is that you can't expect to go back to where you were before. People's expectations have to change, and the mistake of government is to make people think that we can go back to normal, without recognising that before the bust was not normal.' It means a fundamental shift from conspicuous consumption to conspicuous frugality.


A snapshot. Tokyo, December 1989. Japan is at the top of the market and the boom is in full swing. Extravagant coffees laced with gold leaf are the morning pick-me-up of choice for city slickers. Everything is slapped on the corporate expense account with no fear of being challenged. Business back then was very sociable.

'People were spending an amazing amount of money and really became quite arrogant,' says Hiroko Charles, who was working in Tokyo at the time as senior manager for Japanese equity at BZW bank. 'People believed the stock market and land prices would go up for ever.' With 23 years' broking experience in London and Tokyo, she's back in London, mindful of parallels between Japan's boom and bust and what the UK is living through now.

The Japanese bubble was fuelled by an unprecedented rise in land prices. Corporations' stock market valuations were based on the value of their property portfolio. It gave companies a bloated confidence that fizzed over into the rest of the Japanese finance sector.

'Suddenly, everything collapsed,' Charles remembers. 'From January 1990, the Bank of Japan started to raise interest rates and that really dampened the stock market. Every single day, for two months, the market went down. I couldn't believe it. I'd come back to the office and the market would be down again, down again, down again.' The Nikkei, from 39,000 at the end of 1989, kept falling, never to recover. It now hovers around the 8,000 mark. At worse, land prices fell by 90%.

The Japanese crash wasn't accompanied by a credit crunch, nor part of an international economic downturn. In fact, the strong yen made Japan's big exporters, such as Sony, Sharp and Honda, very successful. Not only was the crash confined to national borders but, within Japan itself, to the financial industries and those directly affected by the stock market and property speculation. Many bankers lost their jobs, but most employees of corporations were able to stay in employment. Not until the late '90s, says Charles, did companies start to cut staff and move to more flexible working.

According to Charles, the Japanese government failed to move quickly enough to inject public money into the economy. 'It took Japan a couple of years,' she says, lauding Gordon Brown's fast decision-making. 'Also, the banks never admitted non-performing assets because they were off balance sheet, and that really delayed Japan's recovery.'

What were the biggest lessons the Japanese learnt? 'That the government should have acted more quickly, but also that things don't go up for ever. People changed. They became more frugal and thought about the value of life. There was a change from a materialistic attitude to just valuing your own life. In a way, the bust was a good thing, because it calmed down everything.'

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