Wednesday, November 12, 2008

Why Japan continues to fail

In late 1989 the Nikkei 225, Japan's leading stock index, hit an intraday high of 38,957. Today, 19 years later, it's at 8,800. This multi-decade loss speaks to two things -- one, just how out of control Japan's asset bubble was, but two, the fact that the Japanese government has, for the sake of maintaining jobs, not made the hard decisions that would have allowed the country to grow.

In the aftermath of the bubble, Japan's government rushed in to prop up its banking system, which was teetering under the weight of non-performing loans. Rather than letting businesses fail, this has had the effect of propping them up to continue operating.

As I look at the pressure being placed on the US government to bail out or even nationalize the US auto manufacturers, I see the same faulty logic being used. So desperate is the government to protect these jobs and these massive companies that it is willing to spend taxpayer money to keep Detroit afloat. It might be a good use of capital if the Big Three were thriving companies that had simply suffered from exogenous events that they'd reacted to improperly. But they aren't. These companies are sick and dying, and they have not generated a positive capital return in decades.

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