Nationwide land prices fell by 60%, the TOPIX index fell by over 70% and, between 1995 and 2013, the price level of goods and services in the economy – the GDP deflator – dropped by 18%.This process of asset price deflation in Japan achieved the necessary corrective to the 1980s bubble, judging by cyclically adjusted P/E ratios for stocks and price-to-income ratios for housing, both of which normalisedby the start of the 2000s.
Moreover, the pain inflicted on the Japanese financial sector and broader economy has long subsided. Japanese bank creditgrowth returned to positive territory about a decade ago, and growth in GDP per worker beat all of the other major advanced economies – US, Germany, UK and France – hands down between 2002 and 2008.
Yet despite the fact the post-bubble headwinds to Japanese asset returns have blown themselves out, investors, both foreign and the Japanese, remain traumatised by the ordeal of the bubble and its aftermath.I call this ‘Miss Havisham syndrome’, after the character in Charles Dickens’ Great Expectations who, having been jilted at the alter in her youth, remains traumatised into her old age. Likewise, the causal problems behind poor investment returns in Japan lie in the past, and yet investors remain ofa mindset that blinds them to opportunity.
It is no coincidence that at the heart of prime minister Abe’s plan for Japanese economic renaissance, in place since late 2012, is an attempt to change the mindset about Japan’s economic prospects and its role in the world. Central to ‘Abenomics’, both as cause, via asset purchases by the Bank of Japan, and effect, is a change in expectations concerning returns on Japanese assets.
Financial asset prices have responded strongly, and the TOPIX is up over 130% since November 2012. Land prices are also on the move, though their turning circle is much larger. The bears on Japan and the quick-buck traders call these developments a “QE sugar hit”, and see the profits fromAbe’s policies as mostly already distributed.“Put a fork in Japan, it’s done,” they say. Yet the bears and traders are writing off a scenario that might actually work. When Dickens wrote Great Expectations, Britain was at the apogee of the first Industrial Revolution, the origin of modern rapid global economic progress.
