"The cause of sustained price falls is a lack of demand. When demand itself is weak, prices won´t rise just through liquidity provision." – Masaaki Shirakawa, central bank governor of Japan 

We´ve entered a new decade. Looking back at the past decade, and looking forward to the next, seems like an opportune thing to do. However, I find myself slightly stuck with a trivial and yet somewhat tenacious difficulty: how should I refer to these two decades in a concise manner? In the last century, we used to be able to refer to the Seventies, or in brief the 70´s. We could talk about the 80´s or 90´s.

But, what should I call this new decade: that started just a few days ago – the "Tens", the "Ten´ties"? And then the last decade; should it be referred to as the "Zeroes", the "Zero-ties", or the Noughties, as many have been throwing around already?

Well, certainly, the term "Zero-ties" could suit the performance of the stock markets quite well. After all, most stock markets are pretty much back to where they where ten years ago: a weak performance indeed, filled with weak monetary policies, weak fiscal policies, weak geo-political progress and weak leadership altogether. So, let´s just call it the "Weak Decade" for our purposes here.

Looking back at the ‘Weak Decade´, we can´t avoid being reminded of Japan´s TWIN decades of weakness. Today, at about 10´880, the Nikkei 225 stands pretty much at the same (nominal) level as it did around 1987. And, it´s A LOT LOWER than it was at the end of its great bull market in 1989. On December 29, 1989, the Nikkei peaked at 38,876. In other words, the price levels of the Nikkei today stand at roughly a quarter of what they were 20 years ago...TWO decades later!

Source: Datastream, SG Cross Asset Research

It´s an ongoing debate whether global economies and financial markets have entered a similar path as did Japan more than twenty years ago. The chart above compares the S&P 500 since 1990 to the Nikkei 225 since 1980. The similarities are striking. Most importantly, two things appear to be worth pointing out.

First, Japan experienced repeated and substantial rallies on the way down. If indeed we should consider the Japanese story line a blueprint for the decade ahead, then the current market has potential for more upside in the current bear market rally before it goes A LOT lower.

Secondly, patience is big factor in these kinds of markets. Bear markets can take a long time. Similar to the Great Depression, when the Dow took approximately 23-and-a-half years – until early 1953 – to regain the nominal level it first reached on September 1, 1929, the Nikkei is taking a VERY LONG TIME to regain its health. Despite all the monetary inflation around the globe and certainly in Japan, hardly anyone would at this point expect the Japanese market regaining its 1989 highs anytime soon.

Twenty years of "Easy Money Deflation"

In the aftermath of the global stock market crash of October 1987, Japan experienced a twin-bubble ride into orbit. By May of 1988, the Nikkei had already regained its October 1987 losses. And, by the end of 1989, the index had almost doubled from its October 1987 lows. It is noteworthy that, similar to the US, the Japanese stock market boom was accompanied by a property boom of immense proportions. By late 1989, the grounds of the Emperor´s Palace in Tokyo were said to be worth more than the entire state of California!

In summation, Japan experienced in the late 80´s what the world experienced in the lead up to the recent ‘global financial crisis´ – a huge property and stock market bubble. In Japan, the collapse came in early 1990 and the nation´s economy has never recovered since.

The Japanese did everything possible to get back to where they had come from. Japan cut its official interest rates to zero in 1999 and held them there unchanged until 2006. For all intent and purpose, Japanese official rates have been non-existent for more than a decade. The Japanese government ran one bailout and one stimulus package after another. A wild mix of monetary and fiscal policies, financial market regulations, and protectionist rules was jotted out, all to no avail.

Japan today – still trying to inflate itself out of disaster

More than two decades into its economic nightmare, Japan is still fighting hard to keep its economy from a complete and utter collapse. As 2010 begins, one of the most common ‘predictions´ for the New Year is that Japan will find it very difficult to continually pop out one stiumulus package after the other. With a public debt-to-GDP ratio of well over 200 percent, Japan is by far the most indebted nation amongst the world´s major economies.

Today, after twenty-some years of unprecendented ‘deflation fighting´, Japan remains mired in deflation, with unemployment on the rise once again and the economic ‘recovery´ once again losing steam. The Hatoyama government, despite any prior promises made, is increasing the deficits and growing the country´s debt further. At this point, there appears to be no other way to keep Japan from tipping over completely.

Yes, there are differences between the lost decades of Japan and our Weak Decade. For instance, the Japanese people continued to save throughout the crisis. They largely stayed away from living beyond their means, at least privately. And, the Japanese economy did continue to produce real goods and to export.

Unlike the US, Japan cannot export its money in return for the rest of the World´s goods. It must export goods for the rest of the world´s money. To an extent unmatched by any other Asian nation, including China, Japan relies on its exports to fund its standard of living. That means a ‘cheap Yen´ so that its export pricing can remain competitive.

In this context, for more than a decade, Japan relied on the Yen ‘carry trade´. However, since 2007, the problem has been that as the rest of the world (notably the US) quickly erased the ‘advantage´ Japan´s ultra-low interest rates gave it, the Yen has been going up. Since mid-2007, the Yen has risen by about 25% against the Euro and, much worse, by 27% against the US dollar.

This has destroyed Japanese exports and rendered huge damage to the Japanese economy. And things are going to get worse as the US dollar is taking over from the Yen as the preferred global carry trade currency.

Captive to low interest rates that they don't really control

Economic growth is getting VERY expensive! So far, lower interest rates have been a trend largely produced artificially by governments and central banks. However, we have reached rock-bottom. And, the fact is that governments and central banks can only manipulate the price of money to a certain degree. Once short-term interest rates start rising – yields for long-term bonds are on the rise already – financing the boom will become increasingly difficult.

Yet, every time government fights the economic downturn with FRESH and HUGE amounts of taxpayer money, a true recovery is postponed and the artificial daydream of economic growth, financed on the back of coming generations, becomes yet a little more expensive.

Although the Japanese scenario is not completely comparable to the global economy, the Japanese monetary and fiscal anti-deflation reflex in reaction to the crash in the 90´s was very much the same as the recent and currently ongoing GLOBAL PUMPING APPROACH. Japan has been running exactly the same "stimulus" as the rest of the world is now employing to fight the downturn.

It didn´t work in Japan. And, I doubt it will work globally. If ever there was an economic illustration of the fact that "stimulus" cannot revive a REAL economy, Japan is that illustration.

At then end of this commentary, I still wonder what we will call the next decade?!?!

Latest Daily Bell Articles