- The Washington Times - Thursday, May 2, 2002

Tired of the meandering U.S. stock market? How about Japan? Believe it or not, the Japanese market is coming alive after a 12-year drought.

Japan's Nikkei 225 index rose an impressive 8 percent in last year's fourth quarter and gained another 5 percent in this year's first quarter. In fact, so far this year the Nikkei leads all major stock indices with a 12 percent gain. Compare this to our very own S&P 500, which has dropped 5 percent this year, and the spike looks that much more impressive.

It used to be that Japan's economy and stock market looked set to rule the world. Back in the 1980s, numerous economists hailed Japan's industrial-targeting policy, where the Ministry of Trade and Industry seemed to be effectively choosing the winners and losers. This "crony capitalism" played a big role as sectors favored by the government received subsidies and trade perks. A few large banks determined who got loans and who didn't. And the economic manipulation worked. By 1989, the Nikkei peak reached about39,000,morethan10 timestheU.S. Dow.

Despite the fact that Japan even adopted a Reagan-style tax-reform plan to lower rates and broaden the base during their big '80s, their economy fell apart in the following decade. The '90s saw the Bank of Japanrepeatedly shrink the money supply and the Finance Ministry continue to raise taxes. The falling money supply deflated prices and assets, and the stockmarket dropped 70 percent. Land prices fell by almost as much. Rising taxes pushed Japan's economy even deeper into recession, causing budget deficits and national debt to skyrocket. This was the lost decade for Japan.

Butlately things seem to be changing. The country's basic money supply has grown by roughly 50 percent at an annual rate over the past six months. Appropriately, in response to the creation of new yen, the yen exchange rate has eased somewhat.

Prime Minister Junichiro Koizumi is even talking about a new round of tax cuts. He is also attempting a reform package to open up the $1.8 trillion of savings controlled by the monolithic postal system and turn that into a private-investment vehicle controlled by individual citizens rather than the government.

Meanwhile, Japan's enormous bad-loan problem, which has prevented commercial banks from extending credit and hangs like a lead weight around the economy, has been eased slightly by a new program to "securitize" these bad loans into bonds sold in the credit markets. William Seidman, who led the U.S. Resolution Trust Corp. over 10 years ago with the same program of securitizing bad bank loans, has been advising Japan.

Continued monetary expansion, along with further deregulation and tax relief, could make Japan the surprise growth country of the new decade. Watch the country's stock market as a barometer of future prosperity. While investing in the Japanese market is not for the fainthearted, it could make a lot of sense.

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