Two decades of Japanese deflation casts eerie shadow

It’s a bit Foo Fighters, but I’ve got another confession to make.

As a financial adviser and investor, Japan is not a topic of conversation that I like to get stuck on. But today I’ll take one for the team.

Japan doesn’t scare me because of this month’s devastating earthquake and tsunami. The tragic loss of lives and the potentially disastrous meltdown of a nuclear power generation facility are global disasters that everyone feels. Nor am I talking about the similar devastation caused in Kobe, Japan, in 1995.

And it’s not because the earthquake is, financially, reverberating around the world. The financial cost will be breathtaking. The personal costs, to those directly impacted, catastrophic.

No, I don’t like talking about Japan because it is the poster-boy for the greatest fear of both investors and advisers.

Japan is a once-mighty superpower that, in the 80s, got as drunk as a fleet of aircraft carriers full of American sailors on shore leave and has since suffered the mother of all hangovers that has left its economy perpetually stuck in a negative-velocity time-warp. Got that?

Japan is one of the most powerful economies on earth. It’s one of the G7. It’s seriously first world. The Japanese are large consumers and one of Australia’s most important trading partners.

In the 80s, Australians feared our economy would become a branch office of Japan (the same irrational concern some have of China now). The Japanese were buying our property and our star companies, as they were conquering the world. When I was growing up in the 80s, the joke was “So, did Japan really lose World War II?”

Their main measure of stocks, the Nikkei 225, had gone from below 10,000 points to nearly 39,000 points in the five years leading up to 1990. And if you are worried about Australian property prices now, go check out the price of a bachelor pad in Tokyo in 1989-90.

Then the poop hit the propeller. Since 1990, their market has, at times, been more than 80 per cent down on its peak, with frequent violent crashes. A primary school teacher with 40 years’ experience has made fewer corrections than the Nikkei 225 has in half the time.

Some commercial property values fell by 99 per cent from their peak! Seriously. Residential homes fell by around 90 per cent.

Japan has had 20 years of deflation – that is, falling consumer prices. Do you know how hard it is to sell things when customers are constantly thinking “if we wait a couple more weeks/months, we’ll get it even cheaper”? (You think you’ve got problems, Gerry Harvey?) Deflation is disastrous for an economy.

They’ve got near zero official interest rates. Their government has loaded up on debt. It wouldn’t matter if the government start dropping money out of planes, the Japanese wouldn’t spend it, they’d hoard it.

Japan’s banks became very, very wobbly. They might all have been declared bankrupt earlier, except for their “thing” about writing off bad debts. Must save face.

There’s less spark in the eyes of the Japanese economy than there is in the eyes of a harpooned whale (our major ongoing beef with Japan, which seems a little trivial at this moment).

The only sure way to have made money in Japan is the last 20 years has been to load up on put options (bets that the stock market will fall) every time there’s even the hint of a rally.

Why care about Japan?

Well, you probably have money invested there. Japan’s size means almost everyone with super will have money invested in that economy.

But why does talking about Japan irk me? Because I want to put my fingers in my ears and scream “Nahnahnahnahnah!” at the vaguest thought that Australia could ever repeat the Rising Sun’s “lost decade”. Which has since become two decades.

Every time I scoff at an economist, which is regularly, warning about “bubbles” (different to Michael Jackson’s pet chimp) in parts of the Australian economy, Japan’s shadow lurks.

Could it happen here? Is Australia facing the sort of asset price bubbles that the likes of professional property panicker Professor Steve Keen says we are facing, particularly with real estate?

I don’t think so. Surely not. But let’s hope Australia doesn’t do that time warp again.

Bruce Brammall is the author of Debt Man Walking ( and a licensed financial adviser. .