While the world fights inflation, Japan has been fighting deflation for the past 30 years. Why? What are the lessons from Japan’s “Lost Decades”? Let’s explore.

1. Japan was battered and bruised by the end of world war II and yet by the 1980s it was the world’s second-largest economy. Japan was the epicenter of innovation – Electronics, Computers, Automotive, Aviation, Railroad, and Entertainment.

2. How was the growth financed? The Japanese government provided easy credit at near-zero interest rates to banks that financed the industries.

3.    Zero rates and easy credit, basically, are to the value of assets, what gravity is to matter. The Nikkei index peaked at an all-time high in Dec 1989, real estate appreciated exponentially and inflation was sky-high.

4. Bank of Japan increased the interest rate to 6% by 1990 to tame inflation and the asset bubble. The stock market lost c.50% of its value, and property prices collapsed.

5. Japan’s economy entered into a deep recession, and the borrowers became insolvent. Inevitably, big bank failure followed, the credit market shut down and the country struggled with unemployment.

6. The 1990s is popularly referred to as the lost decade but in reality, Japan has not recovered at all, for the record Nikkei index is still trading below 1989 and commercial real estate has not recovered.

7.  The stinging experience has changed consumer and institutional behavior negating monetary policy impact.

Bank of Japan reduced interest rates to near-zero levels to stimulate growth but the banks have curtailed lending concerned about the risk of default.

The aging population, low fertility rate, and high savings in cash have led to low demand, deflation, and a sluggish economy despite low-interest rates.

8. As a result innovative companies have disappeared from Japan. Economic growth is not possible without financing a certain degree of risk.

Does the story sound familiar? What are the lessons?

1. We are probably in step 4 of the cycle. We are in the process of ramping up interest rates to tame inflation.

2. I do not have all the answers but this pattern has repeated again and again in history.  We need to manage two key aspects to navigate the current situation

⚡  Population: Avoid population collapse in the developed economy and productively engage the population in developing economies.

💡  Innovation: The nation requires risk-takers and adequate financing to generate growth. When innovation disappears and the nation enters terminal decline.

We have seen it in modern history repeatedly. Remember the Portuguese, Spanish, Dutch, British, and Japanese domination. It is time for America to work hard and protect its innovative edge.


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