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JAPAN

JAPAN. 1990s The Lost Decade Presented by Stavros Iatridis Delos Capital, LLC HS Dent Conference Scottsdale, Arizona May 7, 2008. Why Study Japan in 1990s?. Japan is the blueprint model for economic growth among Asian economies (i.e. China)

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JAPAN

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  1. JAPAN 1990s The Lost Decade Presented by Stavros Iatridis Delos Capital, LLC HS Dent Conference Scottsdale, Arizona May 7, 2008

  2. Why Study Japanin 1990s? • Japan is the blueprint model for economic growth among Asian economies (i.e. China) • Japan economic and asset bubble debate - a learning opportunity for policy makers (Bernanke Paper 1999) and investors (winners & losers). • Japan is the first of the developed country baby boomers to experience a demographic peak. Delos Capital, LLC 2

  3. Why Study Japanin 1990s? • Japan is the blueprint model for economic growth among Asian economies (i.e. China) • Japan economic and asset bubble debate - a learning opportunity for policy makers (Bernanke Paper 1999) and investors (winners & losers). • Japan is the first of the developed country baby boomers to experience a demographic peak. Delos Capital, LLC

  4. 1 2 Delos Capital, LLC

  5. Why Study Japanin 1990s? • Japan is the blueprint model for economic growth among Asian economies (i.e. China) • Japan economic and asset bubble debate - a learning opportunity for policy makers (Bernanke Paper 1999) and investors (winners & losers). • Japan is the first of the developed country baby boomers to experience a demographic peak. Delos Capital, LLC 5

  6. Demographics Delos Capital, LLC

  7. Outline • Bio • 1853 “Opening up” - WWII • Seeds of growth to 1985 • “Bubble Years” 1985 - 1989 • Arrive in Japan – 1989 - Financial Landscape • Twin Bubbles Burst – 1990 - 1999 • Post Bubble Environment • Lessons • Q & A Delos Capital, LLC

  8. 1853 Perry breaks 200 years of Sakoku(“country in chains”) Commodore Perry found a rigidly conformist, technologically backward, military-feudal, and largely agricultural society that had been almost totally closed to the outside world since 1638. Delos Capital, LLC

  9. Wars with China & Russia 1890-1905 COAL Delos Capital, LLC

  10. JAPAN 1910 – 1941 • 1910 – Annexed Korea • 1914 - Treaty with Britain –sides with Allies over Germany • 1919 – Gains Germany’s Asian properties • 1937 – Japan goes to war against China • 1939 – US notified Japan embargo aviation fuel and scrap metal • 1940 – Sign alliance treaty with Germany and Italy • - Japan invades Indio-China • 1940 – August US broadens embargo – no oil & Dutch join in • 1941 – Japan invades southern Indio-China in response • 1941 - US freezes assets of Japan • US DEMANDS • 1 Tripartite Pact of Alliance: The US urged Japan to withdraw from the alliance with Germany and Italy. 2Southern Indo-China: The US demanded Japan to withdraw from the southern Indo-China.3 China: The US demanded Japan to withdraw from China. • FINAL proposition called the “Hull Note,” which contained only US original demands, issued by US on November 26th, 1941. • DEC 7th 1941 – Pearl Attacked Delos Capital, LLC

  11. FACTORS FOR RAPID ECONOMIC GROWTH • Competitive currency rate • COLD WAR – Free Pass - NO Military Expenditures • Iron Triangle – KEIRESTU Structure Delos Capital, LLC

  12. #1 Yen devalues – Competitive Windfall Delos Capital, LLC

  13. FACTORS RAPID ECONOMIC GROWTH • Competitive currency rate • COLD WAR – Free Pass - NO Military Expenditures • Iron Triangle – KEIRESTU Structure Delos Capital, LLC

  14. #2 COLD WAR (1945 – 1989) – JAPAN FREE PASS Delos Capital, LLC

  15. FACTORS RAPID ECONOMIC GROWTH • Competitive currency rate • COLD WAR – Free Pass - NO Military Expenditures • Iron Triangle – KEIRESTU Structure Delos Capital, LLC

  16. #3 – Japanese Iron Triangle Ministry International Trade and Industry (MITI) Common Goal Banks Keiretsu Corporations Delos Capital, LLC

  17. Anglo-American Corporate Structure Shareholders Vote & Elect Board Performance Based Managers Day to Day In Theory Board of Directors Role of filter and Accountability Delos Capital, LLC

  18. Keiretsu Example Outside Minority Shareholders Fuyo Group YAMAHA MATSUYA NKK Steel Delos Capital, LLC

  19. High Economic Growth Years (1945 – 1989) Growth Rate Y/Y% High Growth US$90 billion Delos Capital, LLC

  20. Plaza Accord – Sept 1985 Due to twin US Deficits – G-5 decides to: • Devalue USD versus the yen to make the US more competitive • Japan needs to stimulate domestic demand to import more • Japan needs to open up and deregulate domestic markets Delos Capital, LLC

  21. Bubble Recipe Bubble Ingredients Catalyst - deregulation & rising currency Excess Liquidity - low cost of capital, excess availability to money, lax repayment prospects Illiquid domestic assets - stocks (80% cross holdings) & real estate high turnover cost Certainty - “land prices never go down”- take more risk – Positive Feedback loop – rising land values led to rising capital flows to rising land values Delos Capital, LLC

  22. Bubble Years 1986 - 1989 Minsky Cycle Positive Feedback Loop Delos Capital, LLC

  23. Creating the bubble Currency Interest Rates Money Supply Inflation Delos Capital, LLC

  24. Japanese Real Estate and Stock Markets Equity Bubble Peaks Delos Capital, LLC

  25. 1989 1989 - Japan 14 of the world’s largest 20 companies 1980 Delos Capital, LLC

  26. Wacky Equity Valuations Source: Bloomberg Delos Capital, LLC

  27. Emperor’s Tokyo Palace Real Estate Bubble? State of California Delos Capital, LLC

  28. When I arrived Feb 1989 • Expensive City - decadence – signs of excess wealth – luxury brands • Attitude – we lost the war but our Japanese way of doing business is better and we really won • Certainty • Absolute trust in the Government • High Asset Valuations • Large city but few foreigners (school teachers and finance) • Small apartments Delos Capital, LLC

  29. "The Japan That Can Say No" Ishihara’s Assertion Morita’s - Assertion American Business too short term orientated Japan must help rest of Asia Japan needs to do more to improve its image • Japanese technological superiority • Japan should end the US Japan Security Pact and defend itself, because this would cost less and end reliance on the U.S. • Prejudice- Americans believe that the Caucasian world is superior since this era is dominated by the western world, and this prejudice will hurt them in the end. Delos Capital, LLC

  30. Bank of Japan quietly tightening Hoping for a soft landing Delos Capital, LLC

  31. For you golfers – OUCH! Delos Capital, LLC

  32. 1990’s – Asset Deflation BUST – US$20 Trillion Assets LOSS Equity Bubble Peaks Delos Capital, LLC

  33. Bust Exposes Need to Restructure Japanese Iron Triangle Rusting MITI Common Goal Banks Keiretsu Corporations • ISSUES • Information age • Asset bust – bad loans – paralyzed credit system • Banks unable to recapitalize – no write-offs, income flows to bad debtors • High currency environment need to grow domestic consumption • Deregulation – new business models • Cross shareholdings – made restructuring difficult • Lower consumption – lost trust – sent money overseas • No accountability in government Delos Capital, LLC

  34. Monetary Policy Response – Zero Interest Rate Delos Capital, LLC

  35. 1990s – Fiscal Policy Response – inflatecut taxes –temporarily and spent on infrastructure Delos Capital, LLC

  36. 1990s Japanese Economic Growth Flat Delos Capital, LLC

  37. Social Observations - 1990s Post War - Pre 1990s Post Bubble 1990s LABOR – part-time work favored and new workers not offered life long employment. GOVERNMENT – scandals – lack of accountability SOCIETY- humbled by scandals – self reflection - the war really ended – apologize to others Doubt - Uncertainty • LABOR - long term economic prosperity = certainty = employment in fact lifelong employment. • GOVERNMENT - trusted – ministry management – one party dominance by Liberal Democratic Party (LDP) • SOCIETY – on a mission & harmony Delos Capital, LLC

  38. Demographics & Stock Market Delos Capital, LLC

  39. Demographics Delos Capital, LLC

  40. Comparative baby booms Delos Capital, LLC

  41. Population Pyramid Delos Capital, LLC

  42. Domestic Asset Performance 1990 - 1999 1990s – What Worked? Source: Bloomberg Delos Capital, LLC

  43. Sector Performance 1990 - 1999 Delos Capital, LLC

  44. Lessons from 1990s Japan • Debt and asset deflation don’t mix & timely policy response important • In a deflationary bust, buy income streams - stay away from leverage • Personal reflections – I obverse gradual generational change of mentality – arrived to investors never experienced bear market….today an local investment professional with 18 years experience has never experienced a bull market. • Should of attended the HS Dent School of Demographics earlier Delos Capital, LLC

  45. Q & A Delos Capital, LLC

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