My research into Britain’s future continues here in Japan. And I’ve reached a very simple conclusion to guide your financial decision-making going forward: don’t give money to moochers.
That’s the consensus view from those who know what it’s like to live in your future. They lived through one of the biggest bubbles in history, much like our own 2008. In fact, the US tech bubble and the Western world’s housing bubble look boring compared to Japan in 1989.
You’ve experienced two stockmarket crashes since 2000 yourself. But what makes Japan different is the lack of a recovery. Something fundamental changed in 1990 that hasn’t come back. And it makes the FTSE’s 18 years without a gain look good.
I believe Britain is in for the same future: declining demographics, horrifying government debt, an over-financialised economy, a debt bloom, investment bubbles, and wacky monetary policy. Many already apply. Britain is following the script Japan left for us very nicely. Quantitative easing was effectively invented there.
But those are abstract economic figures and policies. What about the man on the street?
I’ve been asking Japanese people what they wish they could’ve told themselves in 1989. What advice do they have for those in Western countries who still believe in things like “stockmarkets go up in the long run” and “central bankers are able to hit their target of 2% inflation”? They chuckle at our delusions.
That second assumption is crucial, by the way. Japanese people expect a small pay cut each year, thanks to steady deflation. Imagine what it’s like to pay a mortgage if your income is slowly going down. No wonder interest rates are so low. Japanese people can’t believe the term deposit rates available in the UK. And that’s after the monetary policy crunch.
If all this seems distant and implausible, don’t forget the Japanese used to be just like you. In fact, they outdid Britain at its most speculative and financially crazed.
In 1989, people justified the Nikkei’s price/earnings (P/E) ratio of over 90 (using CAPE), meaning stock investors were willing to pay more than ¥90 per ¥1 of profits. All else equal, if profits were paid out as dividends, it would’ve taken 90 years to get their money back – a return of just over 1%. Of course, people expected plenty of growth back then.
Instead, they got an 81.9% decline in stocks from top to bottom. These days, the Nikkei’s P/E ratio is in the low 20s, where the FTSE’s peaked in 2000, and the Japanese index has only recently recovered just over half its losses.
A stockmarket bubble is one thing. But it’s the level of delusion and the confidence in that delusion which makes things scary. Japan managed to combine the tech bubble of 2000 with the property bubble of 2008.
People in Japan mortgaged their homes to invest in stocks. Thanks to the conglomerate system, their banker was employed by the same company as their stockbroker. You can imagine the consequences. People were shuffled up the risk ladder. And then lost their homes. A neighbour took her life.
The people living the consequences today are stuck in an odd position. The homes they bought to get on the property ladder in the 1980s are now worth about half of what they were. The property ladder turned out to be pitched on noting but hot air. The higher you climbed, the bigger the fall.
Over time, property values have fallen as fast as mortgages were repaid. So homeowners are stuck. The trouble is that, back in the 80s, they could only afford places that were less than ideal.
Here’s how The New York Times reported on this phenomenon, with my emphasis added:
“We can’t sell and get something better because we’ll take such a huge loss,” said Mr. Nakashima, a serious man who recounts his story with careful precision, sometimes pausing to check dates. “The collapse of the bubble robbed us of our freedom to choose where we can live.”
He rues the idea that homes came to be seen as just another investment. “Homes should be different from stocks,” he said. “They shouldn’t be the object of speculative investing. If home prices move too much, they can ruin your life.”
Some economists say that there are probably millions of people like Mr. Nakashima, trying to make the best of life in homes that are distant from work and for which they grossly overpaid. “There is a whole generation of homebuyers stuck out in far suburbs,” said Atsushi Nakajima, chief economist at the research arm of the Mizuho Financial Group in Tokyo. “It’s sad, but Japan has basically forgotten about them, and is moving on. They are just left out there.”
Mr. Nakajima said he had barely missed being stuck out there himself. In 1991, he was looking at a 100-square-meter apartment (1,080 square feet) for about $600,000 about two hours outside Tokyo. He said his wife stopped him. Six years later, he spent the same amount to buy a more spacious house in a downtown neighborhood. “Maybe my wife should be the economist,” he said.
Housing in Japan is now seen as a consumption item. The locals tend to tear them down and rebuild far more often than in the Western world.
The idea that property prices rise is as laughable as stocks rising to the Japanese. In 2016, retail ownership of stocks hit a record low. And that’s after desperate campaigns from the government to get people to buy in.
When it comes to property, the lack of a rental market is part of the problem. In socially cohesive Japan, there seem to be ways to ensure all people can buy a house (except immigrants). It shows culture can matter a lot in investing.
Advice from your future
So what advice do people have for you from Britain’s future of demographic decline and too much debt?
“Don’t give your money to moochers,” they tell me. A more correct translation details the gender and proclivities of said moochers, but I’m not going to go there. The moral of story from The New York Times is notably similar: listen to your frugal wife.
In other words, save your money when times are good. So you can spend it when times are bad.
Compare that to what’s going on in Britain. Buying a house is so unaffordable that the bank of mum and dad, as well as the government, are helping young Britons on to the property ladder (and into debt). And the government is auto-enrolling us into buying stocks for our pension.
Remember, debt makes sense when you borrow for productive purposes. That’s what makes the asset classification of property so important. Is it an income producing investment, or a consumption item? Japan discovered what happens when you choose wrong.
Japan also has policy advice for Britain’s government. After a decade of attempting Keynesian solutions, the Japanese economy continued to struggle. The only thing booming was government debt.
Then the government tried deregulation. And things began looking up. Until the crisis of 2008…
It’s not all bad news, by the way. 98% of Japanese university graduates got jobs this year. Stocks are rising these days. The Financial Times is reporting that Japan’s pension funds are shuffling back onto the risk spectrum. They’re selling their bonds. But instead of buying stocks, they favour “alternative assets”.
That’s precisely the solution Boaz Shoshan and I are investigating for Zero Hour Alert. Last month we uncovered two further alternative investments promising decent returns.
Until next time,
Nick Hubble
Capital & Conflict
Category: Market updates