Wow 50% here we come

fimonkey wrote: »

Generali, (or anyone else), in layperson terms, what's the deal with Japan then?

Thanks for the ever informative way to waste my days at work all!

There was a massive bubble in assets in Japan. Stock markets were bid up to historic highs, property even more so.

Property became so expensive that the land of the Imperial Palace (3.41 square km) was supposedly worth more than the entire state of California. The Australian Government paid of her national debt by selling an area of land next to her Embassy.

Bonds became so expensive that the Japanese govt starting issuing 100 year bonds because borrowing the money was so cheap.

Then equity prices started to fall a bit. This was partly because export markets were suffering due to recession. However, banks held a lot of their reserves in equities. As these started to fall in value, they had to sell more shares to maintain their reserve ratios and also reduce their lending.

This meant that equities started to fall further meaning that more had to be sold and few loans made. This then started to impact the real economy. Firms couldn't borrow to invest so stopped taking on new workers. Some workers were even made redundant (virtually unheard of in Japan).

Things now got really messy. Firms started to default on payments to banks and their share prices started to slide. The numbers had to be fudged to prevent the banks from going bust (although some did anyway). The prices of Japanese assets went into freefall. Interest rates were slashed. Then deflation kicked in.

Deflation increased the real value of people's debts that were secured against falling asset prices. People were kicked out of work in increasing numbers. Real GDP fell by about 13% between 1991-2000.

The banks have now been restructured. There is work available. However, the economy is still teetering on the brink of deflation and asset prices are still well below their values in 1990, 17 years later. Tokyo land prices are roughly 25% of what they were in 1990 (that's a fall of 75%). On average, house prices are 50% of what they were in 1990.

My fear is that losses in the financial sector from lending subprime and securitisation is going to have much the same effect. Lots of banks have got a load of rubbish on their books now that looks like it isn't set to increase in price any time soon (like the equities on the books of the Japanese banks).

dannyboycey wrote: »

Generali, you have too much time on your hands! But thank you, that was a good post.

When I was working for European Bank and so on a day rate, there's no way that you'd get a short economic history essay out of me about the whys and wherefores of the Japanese deflation. Now I'm at Big Bank and on an hourly rate...

The lost decade is an interesting bit of economic history (if you like that kind of thing). You'd get these great big articles in the paper (especially The Guardian if memory serves) talking about how the old model of capitalism was dead and this sort of Japanese-style Corporatist, Big Government, Paternalistic model was the way forward. I've not read one of those since about 1991.

Guy_Montag wrote: »

Remind me again, what benefits are there from (double digit) HPI?

It means we all get rich selling houses to each other. Nobody need ever work again (excluding all those mugs and muppets that are too stupid to buy a house of course).

Do try to keep up Mr M.