Home—Blog—How the West might avoid a Japan-style slump
Aug 27, 2010, 10:55
Posted byMerryn Somerset Webb
Comments (8)
You can't open a paper these days without seeing something about how the West is turning into Japan.
We are apparently on the verge of setting off on a long and depressing deflationary journey during which bank lending will contract, consumer credit will disappear, prices will keep falling, stock markets will collapse and no one will ever buy a new dress again.
Regular readers will know that I have enormous sympathy with this view. But there are a few things that do make me wonder if it will really unfold in the same way as it has for the poor Japanese.
One of the main things holding back consumer spending in Japan in the 1990s was the utter lack of credit availability. When I first arrived in Tokyo in 1992 credit cards were almost unheard of. You could use an Amex in a couple of extra smart shops but that really was about it.
The same was true when I left six years later. If ordinary Japanese people wanted money and couldn't borrow it from a bank (which generally you couldn't) they went to a consumer finance company where they paid 30% odd for the pleasure.
But that wasn't a particularly socially acceptable thing to be doing: it was a marginal activity for the semi desperate. Here, in the middle of our own banking crisis, things are completely different.
Credit cards are not only common and universally accepted – even when paying the tiniest of bills (and household bills for that matter) – but they still come on incredibly easy terms.
Take the most recent offering from the AA. Get one of these and you can buy what you like and pay no interest for 12 months. The same goes for the Tesco Clubcard credit card which also gives you 0% for nine months on your balance transfers.
My colleague Ruth Jackson wrote about more of these deals this week, but the point is that, had a Japanese consumer seen the like of them back in 1995, she would have thought she'd somehow arrived in shopping heaven.
I'm not sure quite what to back out from this thought in terms of how our banking crisis driven recession will unfold from here. But, be it a good or a bad thing, 0% interest for 12 months just doesn't sound very deflationary does it?
Published in Blog More articles by Merryn Somerset Webb
By Merryn Somerset Webb, May 22, 2012
By Merryn Somerset Webb, May 21, 2012
By James McKeigue, May 19, 2012
Leave a comment
(27 August 2010, 11:38PM) Complain about this comment
How we in the West may avoid a Japan-style slump is not so much in our hands as in the wage bargaining smoke filled rooms of South East Asia. First there was a transfer of manufacturing from the West to East because wages were low, and this lasted for a few decades. But nothing lasts forever, now the East wants a transfer of wealth to follow the manufacturing, and of course it should. Possibly that will be their nemesis?There is going to be enormous pressure on Chinese, Taiwan Malay, Japanese, Indian etc, factories to raise wages, and with the average Chinese factory currently working on an average staggering low profit margin of 3%, they will begin to lose contracts. Manufacturing may even come back to the West... and save us from sovereign debt induced poverty? But it is unlikely to happen in the short term.Credit cards... nah... people are now becoming weaned off them.
(28 August 2010, 09:19AM) Complain about this comment
Attitudes trump access. People are changing their minds about taking on debt. Take clothes. If your peers aren't constantly updating their wardrobes, then there is less pressure on you to do so. Clothes sales plummet. Minor changes in attitude cascade eventually into trends. Soon a culture of saving will prevail, less 'live for the moment' and more 'save for a rainy day', a shift underscored by growing job insecurity. This is deflationary in itself, and when paired up with huge global manufacturing overcapacity, there can be little doubt that the West is turning into Japan.
(28 August 2010, 09:28AM) Complain about this comment
Spending and debt are closely linked to social mood, which is slowly rolling over to fiscal conservatism in the private sectorThe availability of cheap credit will not stop a Japan style slump in the West if consumers do not take it up. Japan in isolation was one thing, but as western economies slide into inevitable depression together, debt de-leveraging will be THE priority over discretionary spendingNo sustainable recovery, no jobs growth, wage stagnation, potential deflation ..It's already starting to happen, and will accelerate significantly, despite Govt meddling. The private sector is finally realising that debt is the road to ruin, and won't take on more of it, no matter how cheapUntil a real, sustainable recovery dawns, job security becomes less of an issue, debt repaid / forgiven / defaulted, public sector waste purged, and we start to generate sustainable wealth again, deflation is something we need to get used to
(28 August 2010, 01:56PM) Complain about this comment
I am always bemused by the way we seem to accept the inevitability of such dire outcomes; almost like some religious zeolot, resigned to God's divine retribution! An alternative perspective is that on one hand we have people who want to consume goods and services, while on the other hand we have people who want jobs, satisfying those wants. All that gets in the way is our lack of expertise in managing the dynamics of the economic control system that should be ensuring productive capacity is fully absorbed by, and matched to, consumer needs. I can't avoid thinking there must be a better way to manage this process.
(28 August 2010, 03:35PM) Complain about this comment
Turning into Japan? You should be so lucky! Your personal debt levels are maxed out, your savings are at pittance levels, you have no exports of significance and even if you did the rest of the world is now dead. Your BofE is out of bullets, IR's at zero already, your people have been lied to and decieved and believe the BS they have been spun, the lives they lead have rationale, thae currency still has meaning and your leaders can do anything to stop the pain. You don't even have any oil of any significnce and your country is cold as hell in winter.How in gods name do you think you are like Japan? Japan has taken 20 years to get into the position the UK is now in, in 2! The people are unprepared for the shock and awe in store. In 2 years you won't recognize the UK. The next 20 years will not be like Japans last 20 years. You should be so lucky! You have no cushion. The UK is fit for a carving.
(29 August 2010, 12:09PM) Complain about this comment
Jake's analysis of the UK's plight is spot on, although I don't share his evident delight in the seriousness of our predicament or his imputation that we're incapable of at least mitigating the worst effects. Unfortunately, we're still largely in the hands of people who think like the preceding commenter, Alan F - i.e. magically. What does the think fuels demand and the ability to meet it? Fairy dust? For nearly two centuries we've been building a vast global system designed to convert the heat energy of fossil carbon into money and Stuff. Modern economic thought discounts the need to use energy to extract energy. Oil, gas and coal are now more energy-intensive to produce (think Deepwater Horizon 2010 vs East Texas oilfield 1901). The system is incapable of growth. We're not going to run out of fossil fuels any time soon but we don't have to in order to experience 'Japanisation' - fossil energy only needs to continue to become scarce and expensive .
(29 August 2010, 05:05PM) Complain about this comment
Edmund Q,No delight from me, I'm happy to tell you. I am just a bit fed up with the amount of complacency the average UK citizen shows.Unfortunately I don't see how the UK is going to mitigate the worst effects. Any ideas? I don't think the Dunkirk spirit is quite what it was.What can the UK do to help herself? I don't know. I'd be interested to hear any.What can wake the UK people up? Probably the realisation that their beloved house prices are not worth 50% of present values. That'll wipe a few smiles from faces.
(31 August 2010, 12:40PM) Complain about this comment
Jake,I think the UK's population is too mesmerised by watching Simon Cowell's Animals Taking a Dump, ot whatever the Year of the Sex Olympics actually is, to take any notice of the reality outside the box. The reality could get very ugly indeed, since so many are unprepared.
Name This will be the name displayed with your comment.
Email This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Comment Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.Sign up FREE to Money Morning here.
22 May 12
21 May 12
Become a smarter investor in just 3 minutes a day.
MoneyWeek is not responsible for the content of external internet sites.