The “lost decades” story is not just a hoax but one of the most absurd and transparent hoaxes ever promoted in the English-language media. ~ Eamonn Fingleton, Forbes, August 11, 2013

The foregoing comes from Eamonn Fingleton over at Forbes. Fingleton claims perhaps to be the only human to have called the 1989 Japanese stock exchange crash.

The only absurd yarn being spun these days is the denial of the quite real Lost Decades story of Japan. The Lost Decades story has nothing to do about Japanese GDP, nor Japanese per capita GDP, nor Japanese per worker capita GDP. As well, the Lost Decades story has nothing to do the unfavorable demographics of an aging Japanese population and a shrinking total population.

The Lost Decades story is about the story of the massive crash of the Nikkei 225 after the heralding of the supposed Japanese economic miracle of the Keiretsu as superior to free markets economics and the American quasi-free markets system.

The Keiretsu failure of a crazed, unwarranted Japanese bank credit expansion led to a banking crisis and the imfamous Japanese Zombie Banks.

Emerging from reputation of an evil empire of uncivilized, ruthless, mindless savages who japped Americans at Pearl Harbor, the Japanese rose from the ashes of devastated losers of World War 2 with major American help. Through their Ministry of International Trade and Industry, the Japanese developed the Keiretsu, whereby firms would integrate vertically through reciprocal shareholding, all supported by bank credit of a mutually co-owned bank. The Keiretsu system drove what most labeled as the “economic miracle of the Japanese.”

After the Nikkei 225 doubled from about ¥2,500 to ¥5,000 between 1970 and 1973, the prices of Japanese stocks took off on a long steady climb between 1975 and 1984, all attributed to the Keiretsu system, which now many touted as superior to the structure of American firms and their industries.

On July 23, 1984, the Nikkei 225 stood at ¥9,703. From then, the Keiretsu banks began a massive credit expansion to their respective firms, letting these firms bypass corporate bonds markets and the discipline of bond traders. the Nikkei 225 followed right along with this credit expansion. In 1985, the Nikkei returned 25.1%, in 1986, 38.8%, in 1987, 35.6%, in 1988, 15.9% and in 1989, 24.9%. Anyone could have earned money betting on Japanese stocks during this run.

Owing to unprecedented credit expansion, the Japanese seemed to live in permanent boom times of their MITI designed Keiretsu, which gave the Japanese ever rising wages, dizzying realty prices and guaranteed lifetime employment. Far too many Ph.D. eggheads in America, with their penchant for human control rather than free markets economics arising from spontaneous order and the twin dictates of the Law of Prices (winning bids of demand in the face of supply set the price) and the Axiom of Profit (the sum of sales must at least equal the cost of production otherwise the producer goes to ruin), hailed the Japanese and their Keiretsu while chiding the American way.

And then after years of unprecedented capital misallocation by the Keiretsu leaders driven by unrealistic beliefs about markets and foolish over expansion of bank credit in preference to sound bond issuance, a major crash happened, which happens when bank credit becomes the predominant credit source of an economy.

On December 29, 1989, the Nikkei 225 hit a whopping ¥38,915.87. That is 401% higher than only five years and five months. From there the Lost Decade began.

The Nikkei 225 returned losses every year but three from 1990 through 2002. The loss in 1990 stood at -10.7%, in 1991 at -25.5%, in 1992 at -29.4%, in 1994 at -4.8, in 1995 at -7%, in 1997 at -17.6%, in 1998 at -22.3%, in 2000 at -17.1%, in 2001 at -28.2% and in 2002 at -18.7%.

Since 2008, the Nikkei 225 has returned losses in four of six years including a whopping -42.2% in 2008 and -17.3% in 2011. The 2011 close of ¥8455.35 was the lowest year-end close in 29 years. Today, the Nikkei 225 sits at ¥13,615.19, which is a mere 35% of its peak of ¥38,915.87.

Fingleton does not understand capital and private economy driven capitalism. Stock prices always matter. As all stock markets are nothing but referendums on the capital structures of the firms that comprise a stock market. 

Stock prices act like a futures market on capital allocation of firms. Stock buyers and sellers engage in referendum on those capital structures from which future earnings might or might now arise. It’s a way any people decide who should be producing what.

Fingleton heaps scorn on financialism. Yet, Fingleton seems blinded to the failure of the Keiretsu system of the Japanese. Because likley, Fingleton fails to get the importance of capital allocation in any economy and having a competitive tug-of-war for that capital, Fingleston seemingly turns a blind eye to the Zombie Banks of the Japanese and how the Keiretsu likely still hampers the Japanese economy to this day.

World investors have bet against the Japanese economy and the still weak capital structures of its firms.

Only those Ph.D. eggheads with their academia economics have waged a rhetorical war of late in effort to hijack the Lost Decades story so as to justify their penchant for the quite real failure that is Quantitative Easing.

Reality-based, authentic economics reveals that quantitative easing (Q.E.) fails to spur on growth in bank credit expansion faster than economic output and thus fails to spur on prices of goods primarily bought with non-revolving credit (houses, cars) as well as with revolving credit (e.g., airline tix, hotel rooms). Instead Q.E. leads to money accretion (new notes and coins joining extant ones), thus leading to higher prices for goods bought primarily with cash and near-cash equivalents (debit cards) such as food and gasoline.

At the behest of major bankers, central bankers engage in Q.E. in hopes of triggering bank credit expansion and thus prices of bankers’ held collateral as assets (e.g., mortgages).

Politicians and bureaucrats have no clue as to what kind of capital expenditures ought to arise for anyone territorial bounded people. Thus, through money accretion, which destroys buying power, and through taxation to service debt interest, which destroys buying power through confiscation, politicians injure citizens and the citizens’ economy.

In the latest reporting, Japanese GDP grew at a miserly 0.6% quarter over quarter, missing expectation of 0.9% growth. This happens to be the biggest miss in one year. GDP has slowed from an already revised lower 0.9% growth for the first quarter.

Also, data from the Japan External Trade Organization showed that exports to China for the first half of the year fell to the lowest level in four years! Not only have Japanese exports to the Chinese hit a four-year low, but also the year-on-year decline accelerated to 16.7% for January-June from 14.8% in July-December.

  • Total Japanese government debt stood at ¥1,008.6 TRILLION (!), which is US$10.26 trillion. Wow, that is 172% of Japanese GDP. In US dollar terms, that debt has fluctuated between $12.99 trillion (2012-09-27) and $9.766 trillion (2013-05-17).
  • Japanese per capita purchasing power parity GDP is US$34,277.76. American per capita purchasing power parity GDP is US$48,441.56. On a per cap PPP basis, the per cap American is 1.41 richer than his per cap Japanese counterpart.

QE has failed for decades in Japan. Doubling down by ratcheting up QE even more under Abe and his Abenomics shall fail spectacularly as well. 

Considering the staggering sum of yen put into circulation by the BoJ in buying Japanese government bonds (Japanese quantitative easing) since 1999, which politicians have spent to have concrete poured everywhere, the real Nikkei 225 is much lower than today’s ¥14,784.83.

The Japanese seem bent on achieving a Lost Quarter of a Century at this point. They might push for a Lost Third of a Century since they’re quite good at it.

Here, enjoy a picture of what a Lost Decade looks like courtesy of Yahoo Finance: