Is Australia turning Japanese?

Last week the RBA finally lowered its growth forecasts for the year ahead but it did so largely with a grain salt, still forecasting a pretty aggressive range of between 2.5 and 3.5%. Tomorrow night, the Federal government will release its Budget for the year ahead and, as Ross Gittins suggests today, will no doubt also assume a trend rate of growth. The real question both should be asking is why the Australian economy has so underperformed since 2008, with below trend growth the norm since the GFC.

The fear among many is that we are another US in waiting. A massively over-leveraged and de-industrialsed service economy just waiting for the penny to drop. The key vulnerability is asset markets and especially house prices, as well as the potential for a China shock. The thesis goes that once past a “Minsky moment” the bust will accelerate on household deleveraging. Richard Koo calls these balance sheet recessions because they as much about repairing wealth as they are about repairing cash flows.

The Carmen Rhinehardt and Kenneth Rogoff book “This time it’s different” is a powerful reminder that such dynamics are inescapable, enduring and deeply painful.

But, there are different examples of such asset busts unfolding over different time frames, with different mixes of public and private pain, as well as different ways of distributing the pain of correction across the polity.

The US model is one: swift and painful house price falls, rocketing unemployment, as well as big falls in labour costs and a big jump in productivity and a temporary surge in public borrowings.

Parts of Europe are headed down a different path of correction. Or, having it forced upon them. The credit dependent PIIGS are enduring long, grinding recessions, public austerity and wage deflation to improve their competitiveness. The upside, if we can call it that, is that that competitiveness will slowly turn into higher investment and more sustainable growth (politics aside!).

Both approaches effectively let the private sector burn (within reason).

The other model is that of Japan. Take a look at the following chart from Steven Keen last week:

Japan’s asset price falls were paced over a much longer time period than those of the US or Europe. The resulting economic shakeout was different too, with a much longer time frame of subdued economic growth, a more slowly rising unemployment rate and a steady but longer rise in public borrowings to offset the private sector’s slower paced deleveraging. In short, in Japan, collective private losses were socialised over a much longer time frame.

What can these paths of correction tell us about Australia’s future?

Interestingly, Australia is analogous with some of the characteristics of the Japanese experience. Australia is enjoying an enormous mining boom, which has contributed a great deal to the prevention of a swift and merciless correction to our asset inflation model. Although the boom has not produced a current account surplus – that is, as a country, our savings still don’t cover our investment bill – it has significantly improved the country’s external position without having to go through the far more painful approach of reduced imports and rocketing external funding costs that typically accompanies modern asset busts.

This is not unlike Japan, where it’s export model of growth was intact throughout its long correction, whereas much of the US bust corrected imports, which quickly flowed out and smashed everyone else. Or the European PIIGS, whose falling imports are slowly but surely sapping the strength of core country exports and banks.

There are other characteristics that Australia shares with Japan in its steady and manageable melt in asset prices. GDP per capita, for instance, has not tumbled. Rather, it has stalled. Household income has also continued to rise, even as household wealth falls. And some of the hit to wealth has been offset for consumers in stalled and falling dimensions of the costs of living, such as food and apparel, as retail sales volumes hold up but not enough to prevent disinflation and deflation. We even have our own version of the Japanese “salarymen”, a key plank in the slow melt of Japan, in which workers were kept on despite conditions warranting smaller work forces in many sectors. Australia’s informal kurzarbeit system is certainly closer to Japan (and Germany) than it is the United States. The price for this is probably lower productivity. Although Japan managed a decent performance for many years.

The Japanese experience since the end of the eighties is often described as the “Golden Recession”.  So, is a golden recession possible for the Australian economy?

First, it is sobering to realise that this is the best case scenario, one in which China continues to boost the nation’s external accounts via historic commodity demand and prices. In that event, a decent current account will prevent global markets from raising the cost of our bank’s borrowing further. It may even be enough to stall the asset price correction for a time and knock Australia onto a shallower path of correction than that endured in Japan. Certainly we are better placed demographically than Japan, with our aging population able to be offset by better birth rates and immigration.

But there are some BIG differences with Japan too. The most crucial is national savings. In Australia, we don’t have…any. Japan had enormous savings when it’s asset bust began. Probably the most important factor in its slowed decline was the slow running down of private savings, much of which was redeployed as government spending, which is why the Japanese government now has a debt stock at 210% of GDP, the largest in the world. It is mostly owed to Japanese citizens and as long they’re happy to lend, the cost of borrowing the money will not rise and no austerity will be required. And so long as the spending goes on, the economy keeps ticking over.

On top of that, as one of the world’s largest economies, and a source of one the world’s most used funding currencies, Japan is able to print money and also fund government expenditure using quantitative easing.

Both of these are impossible for Australia, not least because the government balance sheet guarantees our immense external private borrowings, so any deterioration in its quality will not be received as generously by foreign creditors as it has by the monolithic Japanese public. And any attempt to ease monetary policy too dramatically will be met with capital flight, raising real borrowing rates anyway.

So, in the end, can Australia’s track Japan’s golden recession or find a shallower path of correction for its asset prices? The first observation I’d make is that I understand the framing of this question is a bitter pill for Australia. After all, I’m leaving no scope for any outcome other than a decline in living standards, only the pace is in question.

Second, the shallower paths of correction are clearly dependent upon the assumption that Chinese demand for our resources continues to grow.

Finally, Australia shares one last thing with Japan that make me think none of this will be planned for or addressed sensibly. Rather, we’ll sail on as if nothing has changed and deploy all of our resources in fighting the outcome rather than seeking to make best advantage of it. The rise and rise of vested interests on both sides of politics will prevent us extracting the most value from of the mining boom and keep policy focussed on restoring our fading asset-inflation model.


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  1. Charles Ponzi

    Personal debt levels are much higher in Australia than they were at the beginning of Japan’s long decline in house prices. Japanese banks were not forced to borrow from overseas as Japanese had lots of savings in bank deposits.

    The other main difference, is that now we are facing a global debt crisis. When Japan started to decline 20 years ago, it could still export goods to other economies that were not in recession.

    • Indeed, that is the key difference CP. The oft-touted “muddle through” scenario appears to me to be dependent upon a fair amount of “boom” going on elsewhere. Enough to support everyone’s “growth”.

      It seems to me that the post-war Japan/Germany thence China/Korea/SE Asia et al development – predominantly via manufacturing “stuff” to sell to others – was largely if not entirely dependent on the multi-decadal debt-financed consumerism “booms” in the West. With those decades now over, I fail to see how (eg) the BRIC’s can continue to sustain their development booms, with the West deleveraging.

      The debt-financed global “growth” model is broken, IMO.

    • +1

      It’s mathematically possible. But it relies too much on other economies’ performance, esp China, to save us.

      It’s worse than Man Utd’s chance of winning the league title IMO.

  2. If we’re following Japan (an hypothesis I have been in agreement with since 2007), then based on the decline in the Nikkei from its 37,500 peak, we can extrapolate that the ASX500 will slowly decline to under 2000 over the next 18 years!

    • Why not sooner. Take a $Trillion or two out of the Australian economy and…?

      25% of the ASX are the 4 banks. In all other property crashes (USA, Ireland etc) the banks stocks lost 90%. There is 1100 ASX index points right there.

      • Not to mention our high unit labour costs that even the miners are now seeing, excessive compliance even though at COAG there was an attempt to tinker to make it better. A slow decline over ten years probably, but who knows. We do have huge LNG assets and that might save us a bit. If we can get the aviation LNG blend fuel accepted there is another positive outcome, but I’m largely cautious about Australia and think H&H has nailed it again.

    • RBA is taking steps to encourage savers out of deposits and into other investments. This accelerates the decline.

      By contrast Japan started easing interest rates in 1990 and they did not get the bottom till 1996.

      Australia will be more inclined to follow the US that took from late 2007 to end of 2008 to go all the way down.

      Encourage the suckers into asset purchases and make the collapse more severe – that is the work of central banks. None of them look at private debt in their models. Bank profitability is directly linked to debt creation – who can blame them for wanting more of it.

      My bet is that Spain collapse will be the next “black swan”. Although if anyone cared to look at their private debt levels in 2007 they could easily forecast the current dilemma. The collapse in Australia has been postponed by the value of commodity exports but private debt levels are as bad as anywhere in the world.

      • It’s hard to say what the next event will be (Greece might just kick it off), but credit growth is going to stay low for quite a while. Gail Kelly said they are looking to focus more on deposits. My view is because they have to. Agree on push to get savers into equities like the UK/US etc.. I wonder when Swan will attack super as well.

        • One has to think the near future is rather bleak, when so much of the debate revolves around who/what is the next black (red?) swan.

          • I see it as slow growth with a succession of events. How are EU states going to payback LTRO’s if you look at capital flight, and rising unemployment. The US will continue IMO to print, plue more. So I agree with you’re thinking.

    • No, price earnings support current stock prices in Australia. Earnings will need to seriously deteriorate to get any long term, permanent drop. We will suffer shocks and house values have to fall to return to fair value.

      One problem in getting house prices to fall substantially is the price of inputs to the building industry. Trades have never had it so good and, while this situation continues, this will continue to support new house prices and their substitutes, used houses.

  3. The last sentence says it all for me.

    Well done calling them “vested interests” rather than “stakeholders” too!

  4. The period from 2008 to 2012 in Australia will be viewed as opportunity lost. The start of mortgage deleveraging that commenced in 2008 was reversed by the various government house vendor boost programs. Rather than a gradual decline in debt from 2008 it was reversed to hit new highs.

    The crazy thing now is that the RBA has reduced interest rates to stimulate the FIRE component of the economy and reverse the savings trend. Some will be tempted to get back into asset markets to get higher returns rather than leaving savings on deposit.

    Meanwhile the Federal government is trying its hardest to suck the vitality out of the miners. They are facing harder times in Australia due to escalating costs (labour and taxes) and there are more attractive places to invest. China is also financing supply diversity across the globe so the commodity prices are trending down.

  5. It really does look like we are in for a Japan rather than US experience. Pain of some kind is inevitable.
    I think we do have ways to minimise it but our Laboral masters are far too married to the Neo-Classical growth through austerity dream to even contemplate them.
    Somehow our ponzi assets have to be brought back to reality and our sinking employment needs to be addressed.
    Borrowing will just make us Japan, the Federal Government needs to realise that it doesn’t need to borrow $AU ever. And that intervention, either bail-out or negotiated write-downs of debt will be needed to avoid a lost decade. And the aggregate demand has to be high enough to employ enough Australians to consume our products.
    If we somehow get a government that figures this out they would have to handle delicate mortgage interventions and somehow spend a lot of money without wasting too much or just funneling it into the FIRE sector.
    Sadly unlikely. Even the Greens following the Neo-Classical dogma.

    • interested partyMEMBER

      “Somehow our ponzi assets have to be brought back to reality and our sinking employment needs to be addressed.”

      From where I sit you can,t have both.
      One mans income is another mans expense so if one man pays down debt instead of consuming, then less employees required to service lower spending.

      Tough choices ahead.

      • That’s why it can only be fixed by government intervention. A combination of policy to relieve debt and boost employment. Both cost money and you can’t take much money from elsewhere in the economy without just moving your problem. Which means running a deficit. Borrowing is automatically a headache but spending without borrowing (net money creation) is one of the Neo-Classical sacred cows.
        Even with a best case there is still a lot of loss to spread around but government could reduce that.

        As for tough choices, worldwide we have seen government bail out creditors and leave debtors to rot regardless of who is at fault or which country. I wouldn’t want to bet on our lizards being any different.

        • interested partyMEMBER

          If we head down the path I think you suggest, then this exposes the economy to a possible ratings downgrade, which then puts us on a greasy slope…..I get what you say but we seem to be in a spot here.
          Politically, our “lizards” are hellbent on surplus ( external pressure??) and don’t have the courage to backflip…..suicide!

          In the meantime, the economy flounders, and waits for the inevitable.

          I have issues with government intervention…………they had a big hand in creating this mess, so looking for answers from that lot is questionable.

    • Agree Glissom. Blame the accountants for double entry book keeping. Any shortfall in money can simply be met from thin air.

      ie no printing of notes is necessary, pensions, for example, can be paid simply by crediting the bank account of those entitled. No taxes or borrowings are needed and this does NOT increase the demand for holding cash money.

      Sadly, noone in power has the intellectual brain power or courage to even contemplate a bit of MMT.

  6. ‘Both of these are impossible for Australia, not least because the government balance sheet guarantees our immense external private borrowings, so any deterioration in its quality will not be received as generously by foreign creditors….’

    Sorry to harp on about this but name me one country (other than the PIIGS) where 10 yr bond yields are higher than Australia’s AND where the percentage of government debt-to-GDP is also higher ?

  7. Theres nothing golden about Japan’s 2 lost decades.

    With a public debt-to-GDP ratio of 210%, it only takes a few basis points increase in bond yields to absolutely crush Japan’s fragile budget.

    After 20 years of Keynesian stimulus, public works projects, zero interest rates, they’ve got nowhere left to move.

    Japan should be on everyone’s radar in the next 2 years.

  8. Ronin8317MEMBER

    Japan’s government debt is at around 200% of GDP, and interest rate has been effectively zero for 20 years. Politically, it is impossible for any Australian government to run a deficit of that magnitude. Without government stimulus and zero interest rate, I expect Australia’s situation to be much, much worse.

    It is also wrong to say Japan’s employment situation is similar to Australia. Many medium and large companies only recruit fresh graduates as employees, and someone who is laid off have very low chance of re-employment. This is why labor laws makes it very difficult to dismiss a permanent employee. To bypass this, a lot of workers are hired as ‘temporary workers’ on a semi-permanent basis. When the economy turned sour in 2008, many of the fired temporary workers ended up living on the street as temporary workers have no unemployment insurance. As it’s a case of their contract running out, it doesn’t show up in statistics as being retrenched or fired.

    • Many medium and large companies only recruit fresh graduates as employees, and someone who is laid off have very low chance of re-employment. This is why labor laws makes it very difficult to dismiss a permanent employee. To bypass this, a lot of workers are hired as ‘temporary workers’ on a semi-permanent basis. When the economy turned sour in 2008, many of the fired temporary workers ended up living on the street as temporary workers have no unemployment insurance.

      The phenomenom here is know as freeters.

      it is an awfully tragic story. More to add is the change in laws regarding employment conditions, despite the trumping of a ‘kurzarbeit system’ in Japan.

      The reality is a virtual apartheid system based on age. Their boomers have higher wages for the same job, they have greater bene and stricter dismisal laws. Their young are underpaid and vulnerable.

      Now without looking further, thinking of how this game would play out, this system beenfits boomers and their overpriced property investments, with a young generation that can’t afford much more than a sustenance lifestyle after they’ve paid the rent.

      Rationally, you’d think this plays itself out in young people then giving up, opting uot of a system that gave uo on them.

      This may explain record low birthrates, record low marriage rates and 25% of the adult population living single, chaste lifestyles.

      If you can’t accomplish anything despite busting your arse, then why bother?

      • Paid the rent? As I understood it the majority of young Japanese are living at home well into their 20s and even 30s. Partially that’s cultural differences, but it’s a difference that does play out – with such a low birth rate, there’s little pressure to move out…

        • Yeah, they do stay at home because they want their lives to be more than commuting to a cubicle, to pay rent… rinse-repeat.

          But when you say ‘little pressure to move out’.. correct. They have no ambition because there is nothing to plausably strive for.

          A wage for a young person there props up the future lifestyle expectations of their boomers. Nothing material is to be gained for ones self with increased levels of personal exertion, so why engage in it.

          They’ll live at home til they are 50, then inherit their parents place. A place that took 70 years to pay off because their boomer parents paid too much for it.

          Then live another 30 years.. alone, childless, sexless.. with a room full of expendable material clutter from Sony.

          ‘I purchased, therefore I am’

      • drsmithyMEMBER

        This may explain record low birthrates, record low marriage rates and 25% of the adult population living single, chaste lifestyles.

        Chaste ? I hope you’re not equating living alone with not getting laid. This is the era of “friends with benefits”. 🙂

        • I’ve read studies that assert 25% of young japanese adults (both sexes) are sexless.

          FWB seems to a phenomenom in the entitled, overweight english speaking world, where rampant chlamydia is leaving a large number of these same women infertile.

          Japan for the win perhaps.

  9. “”so any deterioration in its quality will not be received as generously by foreign creditors as it has by the monolithic Japanese public””

    Is this perhaps the REAL reason both parties are so hell bent on impressing the Credit Rating Agencies with a surplus??

  10. I’m guessing Japan didn’t have close to 10% of its population voluntarily losing money on investment properties. I think MacroBusiness needs a collective noun for negatively-geared landlords. My suggestion is a ‘catastrophe’.

  11. A great, thought provoking and thorough article. Thanks for your courageous efforts to educate the public H&H.

  12. 1. Japan’s real gdp/capita hasn’t stalled, it has steadily increased from the 90’s to today, despite the bubble burst and its aging population; see: and

    2. For the 2 things “impossible for Australia”: The cost of borrowing for Australia needn’t rise at all if the RBA provides the funds required. We can “print money and also fund government expenditure using quantitative easing” just as well as Japan can; we too have a free-floating fiat currency and a central bank. There is no worry about “capital flight”; if such a thing did occur it needn’t raise real borrowing rates, because the RBA can inject the funds required to bring the rate down. The RBA controls the cash rate, and thus indirectly controls the other rates in the economy.

    • On 1, yes, got me on a technicality. Would be more accurate to say “slowed”, though there were longs stalls.

      On 2, again you’re right technically but try it and see what happens. Markets don’t run on MMT principles, they run on monetarist theories and the capital would most definitely fly!

    • So far so good, the only problem will be non-Aussie denominated foreign debt. As the dollar dives, the foreign debt-to GDP could shoot through 100%. A default of foreign debt will solve our problems, of course. But it would be the banks defaulting, as they hold most of our foreign liabilities. Maybe we are yet to taste a true credit crunch when all 4 pillars are wiped out at the same time?

      • Australian banks convert foreign borrowings immediately into $A (if funding $A assets). They then enter into swaps to cover the scheduled interest and principal repayment in foreign currency. For all intents and purposes their foreign borrowings are equivalent to dollar funded liabilities.

        APRA’s supervision could be better but they aren’t so clueless as to allow an asset liability mismatch of the type that you assume (hell they barely allow maturity mismatches).

        • Let’s just hope those counter-parties are as soundly run and hedged…

          Just for kicks… what would happen if they weren’t? (I’m a computer guy, so I actually don’t know and would like an answer)?

  13. To HnH:

    Now that the diagnosis of our economic disease is affirmed, and symptoms are becoming full-blown, do you recommend any prescriptions to cure our ills? “Only time will heal” Austrian therapy? Or Keynesian “live another day, who cares about tomorrow”? Accelerated creative destruction or palliative care?

  14. Is anyone else getting the “Premium freehold condominiums in the heart of Tokyo – Toward the peak of status” ads?
    More seriously, I get paid in yen and so I think long and hard about the Japanese economy. This article has given me some insights, as have some of the comments.
    Bear with me while I think out loud. Japan has massive government debt, and almost all of that debt is owed “domestically”. Domestically means banks, companies, institutions such as the post office and the pension fund, and the wealthy. The “wealthy” consist almost entirely of boomers, partly because of the rigidly hierarchical nature of Japanese organizations, but mainly because economic opportunities are systematically denied to young people. (You need a wealthy guarantor just to rent an apartment – having a good job and paying several months’ rent in bond and shake-down money, I mean “key money”, is not enough – so imagine how hard it is to get credit to start a business, but I digress..) The astonishing demographic trends in Japan mean that baby boomers are about to retire en masse, well, most of them will probably try to hang in there for another five to ten years, but eventually the boomers will either start drawing down on their savings or like for higher returns, as the pension fund is already doing. Traditionally, the Japanese are quite risk averse, and so many retirees are probably more likely to reduce their consumption to the bare minimum rather than look for high-risk/high-return investments, but as the proverb says, necessity is a mother… or something like that.
    My question is, what scenarios could there be if the unsustainable stops being sustained? What happens when a sovereign defaults on its own people? What is the end point of the long, slow squeeze of everyone deleveraging and cutting back on consumption?