"Japan Is Not The End Game" (?) - The Definitive Japan Case Study

Tyler Durden's picture

As we have been expecting, the literature coming out of the investment banks analyzing the "Japan case", and specifically how it pertains to the US and the rest of the world, is coming hot and heavy. Yet the attached report by Soc Gen Klaus Baader and team could well be the definitive analysis on the topic. While we do not necessarily agree with the paper's finding, which is simply that "Japan is not the endgame", the multivariate analysis conducted is second to none. And another key topic analyzed by the Soc Gen economists is whether EM growth can offset the deleveraging in the mature economies: a topic near and dear to Jim "BRIC|N-11 Decoupling" O'Neill. Here the conclusion is more palatable: "We see the Chinese economy following Japan, but more of Japan in the 1950s and 1960s. Chinese policy makers also see this repeat pattern, but are taking steps to avoid the preconditions of a bubble economy that afflicted Japan in the 1980s." The paper's conclusion is presented with just the right dose of optimism and pragmatism (it does after all come from a sell side team): "Managing capital inflows is the next challenge. FX adjustments, fiscal and monetary tightening, domestic prudential regulation, and capital controls are the tools available to manage these inflows. These have significant investment implications. Further, slippages could exacerbate global imbalances and slow growth and other needed reforms."

Yet the punchline and the take home is the following multi-vertical comparison between Japan, and the US, Euro area and the UK. Easily the best matrix of this nature we have seen (with the blatant exception of the demographics in the US being better than those in Japan... those could well be the cause of armed conflict as Albert Edwards pointed out previously).

Full report:


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
midtowng's picture

We are Argentina. Not Japan.

Xedus129's picture

Or 3rd Century Rome. 

Many historians speculate that the rapid growth of the empire over a relatively short time and the economic inflation that followed could have contributed substantially to the empire's decay. Due to the incredible size of the empire, it required a huge budget to maintain many key elements in its survival such as roads (essential for communication, transportation, and the moving of armies) and aqueducts (many of Rome's cities relied on the water that it provided). At the time the empire was fighting enemies on all sides due to its expansion into their territories and was already contributing huge sums of silver and gold to keep up its armies. To try to combat both problems, the empire was forced to raise taxes frequently causing inflation to skyrocket. This in turn caused the major economic stress that others attribute as one of the causes for Rome's decline.

maddy10's picture

Oh no sireee!!!!!!

There was no bubble bursting or anything!!

It was just a 'Relief Farting' of excesses in the system! 'suck it up and cope, thanking god all the time'

why, you wanna kill a beautiful system for just excess gas!!

Ask my dear friend Charlie FearMunger!!!


snowball777's picture

Call it an analog of the cubed/squared law.

When an object undergoes a proportional increase in size, its new volume is proportional to the cube of the multiplier and its new surface area is proportional to the square of the multiplier.

When a physical object maintains the same density and is scaled up, its mass is increased by the cube of the multiplier while its surface area only increases by the square of said multiplier. This would mean that when the larger version of the object is accelerated at the same rate as the original, more pressure would be exerted on the surface of the larger object.

tom's picture

Intriguing conclusion that US corporates aren't over-leveraged. And totally unexplained.

US non-financial corporate debt is 95% of GDP, about twice the Eurozone average and higher than all the Eurozone countries except Cyprus, Ireland and Luxembourg.

FranSix's picture

Good inflation-adjusted bear market comparisons here.  Not everything will be the same, but as they say, history rhymes:

Now And Futures.com has an inflationary viewpoint.


How the Soc Generale can make comparisons without even adjusting for inflation is beyond me.

This one provided for comparison:

dshort is also an inflationist viewpoint


Part of the outcome of a contraction of the credit cycle is negative interest rates.  So far, we are seeing TIPS yields negative in the 2-year and the 5-year.  Should the 10-year TIPS yield zero or go into the negative, then Goldman's paper predicting the outlook or the gold price will hold true, and we'll see ~$1780/oz. U.S. gold.

Miles Kendig's picture

Just an indicator in some respects.

doolittlegeorge's picture

definitely not Japan.  Since when did a "sudden drop in Japanese interest rates" cause the price of gold to rise 5 fold?  Europe is still trying to rebuild from two bouts of "Total War"--even Rome knew how to compromise with barbarians.  Britain stands out both because it has experience with Empire and Commonwealth.  They have the added exposure of slapping their names all over buildings in New York City of late.

suteibu's picture

A few comments.

The USD does have the advantage to the JPY because it does not have the dominant USD depreciating against it as was the case since the forced appreciation of the yen in 1985 and which continues to this day.

A generation ago, the demographics in Japan were not the great problem that they are now.  The two decade economic slump has accelerated a trend toward imbalance, but their problems were no different than the baby boom generation is for the US.  The advantage for the US comes from the 40-year influx of immigrants, mostly low wage illegals.

The fact that the US has taken faster and more aggressive action than Japan at the onset might be an advantage for those who believe in the Keynesian stimulus/debt model.  It assumes that this works but the Japanese didn't do enough of it.  It remains to be seen what a 200% debt-to-GDP will do to the US economy, though certainly the experience for Japan should give some insight.

This report could have been written by Richard Koo and seems to be little more than a prospectus for continued investment in the West...a nice pat on the back.

What is not mentioned is that the US rode its own recovery from the oil shock recession on the backs of the Japanese.  They want to do the same thing with the Chinese but it looks as though China learned a lesson from Japan's experience and don't want to play that game.  For the US, old strategies are the best strategies, I guess.

One final thought.  Japan decided to dive head first into becoming a Swedish-style welfare state in the early 90s, something that contributed to their debt and continues to be an anchor on the economy now.  For the foreseeable future their deficits will run in excess of 50%.  The US currently has 44% of the population on government sustenance of one type or another and given that jobs will not return quickly and nothing is being done about the continuing stream of illegals in the country, the trend seems to favor more rather than less going forward.  I suppose the French can't see this as a problem.

Fred Hayek's picture

The tremendous irony of Japan's choice to become Sweden is that at around the same time as Japan indulged in massive rescuing and zombification of its banks, Sweden did the opposite.  Sweden took a much more free market approach, letting banks fail and nationalizing some but then sending them out on their own.  One wonders where Japan would be today if they'd gone that route.  Sure, they would have had a terrible few years in the early 90's and they would still be in the demographic vise but they would have real banks and they wouldn't have massive national debt.

suteibu's picture

Yeah.  They are still propping up the banks.  It's like a cancer...the body gets weaker every day.

I'm don't believe the demographics would have reversed its trend with a better economy for the last twenty years, but I do believe that the bad economy made a chronic problem acute.

maddy10's picture

The whole assumption that numbers and humans behave alike is the crux here!

theory believes that economies keep growing infinitely forever which is false and frankly, unnecessary.

Japanese today are in a much better place than after world war II and all the septa/octagenarians need not go into debt just to keep GDP numbers growing.In fact presently,you are not wealthy if your wealth cannot be counted in numbers!!

people can live life of fullness and content with whatever they have right now

economists should stop treating their myopic focus on GDP numbers as wealth and prosperity.


bada boom's picture

Here is what our friend mr bernanke said during his famous printing press speech in 2002,

"First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan."

Well now, look at all the debt the US has racked up since 2002 and govt debt is expanding rapidly.  I would like to know if bernanke still thinks that?

"Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.

In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States."

Tarp and the 800 billion stimulus must have been the "tools." Now, we have more debt and not any real improvement. I doubt there is much political room for more.

So maybe we are not really that different after all. 

Caviar Emptor's picture

I've always maintained that for the US, Japan is actually the best case scenario. 

First let's state the obvious: Japan has healthy manufacturing, industry and export markets. The US has gutted its own manufacturing and industry by policy choice. Japan has socialized profits from exporting by becoming like Sweden. US has socialized risk only. 

The US going forward will not have the social and political stability seen in Japan as a consequence of these policy choices. A large reservoir of unemployed and unemployable, diminished youth expectations will combine with a terrified elite to polarize the US political scene. 

There's 2 ways of looking at the "lost decades" in Japan: they may actually be 20 years ahead in dealing with the problems the US now faces. Only they had the luxury of contending with them during a period of global prosperity and stability that supported their economy. That does not appear to be the case going forward. 

Finally Japan had to contend with deflation during the "lost decades" after the bubble burst. US will have to deal with biflation: post-bubble deflationary forces combined with spiraling input costs as a result of excessive global dollar reserves, global growth and shortages. 

chinaboy's picture

Thanks ZH for posting the socgen study.

(1) There are interesting charts.

(2) The logic of the socgen piece is funny. a. Conclusions are not derived from charts. b. Not really parallel situations.  

(3) I know 2y10y, swaps are big deals for bond traders. But they may not 'efficiently' reflect fundamentals. To draw parallel and even deduce the general economics sounds funny (are they newbie or something?)

(4) I suspect time could tell that the Japanese had successfully manipulated market for as long as they can without bet the whole nation or keep telling lies like the Europeans.




trav7777's picture

Did I read some bullshit that china is acting to fend off bubbles?  WTF LOL.

Like those empty cities and rampant, epidemic property speculation?

Coldfire's picture

If you ask the wrong question, you'll never get the right answer. The question is not about whether Keynesian "policymakers" are getting the central planning right, but whether they will abandon that delusional exercise sooner, causing a rapid collapse of the debt Ponzi or later, causing a total collapse of the currency.

old_turk's picture

I have got to LOL on Soc Gen's take of the issues in the Euro Area.

"Excess leveraging in private sector balance sheets." 

"No. Only in pockets ...etc."

Really, same thing on currency, "Firm nominal currency ... real currency depreication (via deflation."


Deflation occurs through credit contraction ... which would follow form via deleveraging.  The disconnect here is overwhelming.

Of course, they (Soc Gen) are Euro zone so I should suppose that they must sell their book (ie invest in France, we're AOK, No. 1, finest kind, those US/UK guys are a bunch of loser buttheads!!!).  Not that I disagree with their take on the US/UK guys ... we more than likely are.

Dollar Bill Hiccup's picture

Nice work showing Europe's non financial leverage and household leverage. But to focus on tiny Ireland and Greece is not the issue. Because if SocGen itself is stuffed full of their sovereign debt, what about the enormously larger Spain and Italy?

In Europe, it's the banks stupid.

CL1's picture

In the evening ceremony chanel bags,chanel handbags sale as the first high-level chanel designer handbags custom Chinese star chanel bags prices uk XuQing alone in Paris – 2010 Shanghai chanel bags online uk,chanel bags uk online shopping early series dress coach outlet as ceremony. coach outlet store is Karl Lagrange coach outlet online the anfield fantasy coach outlet 2010 is 30-40 in Shanghai outlet 2010 coach handbags,coach handbags oulet China’s amorous feelings chanel 2.55 handbags,chanel handbags black different dress.