Jesper Koll, former chief economist of Merrill Lynch Japan and author of two books in Japanese, Towards a New Japanese Golden Age and The End of Heisei Deflation, has teamed up with Global Treehouse, a global community of leaders dedicated to what it calls “mind-fit-ness” and innovation, to release the first in an eight part deep dive into the positives of Japan’s economy.

Koll is unique as he tends to be one of the few consistent optimists about Japan’s approach to economy building and has spent a career presenting and interpreting lesser known facts about Japan’s economy often overlooked by other media.    

This second session focuses on Japan’s political leaders, whom he defines as “elites”, not being afraid to make long term decisions for the country despite heavily entrenched vested interests and electoral popularism.

In the session he explains how Japan intentionally burst its own bubble to preserve the purchasing power of future generations.  He also outlines two other, more contemporary, examples of Japan’s leaders not shying away from tackling issues for the long term; reigning in big pharma and big telecom costs.

What does this have to do with real estate?  Everything happens in real estate and learning more about overall macroeconomic trends helps in deciding whether or not to purchase.

Quotable Quotes:

When I talk about the elite, I mean predominantly the technocracy, the Japanese bureaucracy and as well as actually the Japanese politicians.  In other words, it is the administrative state that is the elite of Japan that, in my opinion, works extremely well to ensure it is not vested interests, it is not populist instincts but that it is actually the good of the people that gets served.

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The starting point of the Japanese bubble economy was not something in Japan but something outside of Japan; it was the Plaza Accord when in 1985, the United States of America forced a massive devaluation of the dollar onto the world and specifically on Japan.

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That massive appreciation of the yen which went from ¥260 against the dollar to ¥160 against the dollar within a couple of months, it threatened to squeeze to death the Japanese economy.  So the Japanese elite were struggling to come up with a solution that could counter the deflationary impact of dollar depreciation of Japan.

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What they come up with was deregulation of the financial markets, deregulation of the real estate market, in order to create as official policy, an Asset Doubling Plan.  This is very important, you remember, in the 1960’s, then Prime Minister Hayato Ikeda launched the Income Doubling Plan which got Japan onto the world stage.

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In counter policy to the Plaza Accord, it was [Japan’s] ruling elite’s asset doubling plan that actually got things going, created a massive boom in not just asset prices but also domestic demand which saved the Japanese economy from the deflation that could have come from the Plaza Accord.

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By 1988, the Japanese elite began to think there were big negative effects from the bubble economy.  And as a result of that, the Japanese elites started to think about how to step on the brakes [and try to cool down an overheated economy].

The biggest brake [or influential action] actually came from the Bank of Japan.  It is very, very important to note that the Bank of Japan is the only central bank that actually burst a bubble.

Never in economic history have we seen the ruling elite [anywhere] consciously want to burst a bubble.

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It was Bank of Japan governor Yasushi Mieno, who became governor in December of 1989, and in his first speech…said something like “Thank you for appointing me to this position.”

His second sentence was “Bad things are happening in my country.  A graduate from the best university, entering to work for the best company in Japan, can no longer dream of ever being able to afford living in an apartment within a 2 hour commute.

“This is a bubble, this is bad, and I will burst it.”

[The Bank of Japan then] hiked interest rates from 3 percent to 8 percent within a half year and the bubble collapsed.   

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Of course, there was an enormous amount of hardship that came from the deleveraging, that came from the negative wealth effects, that came from the collapse of real estate prices…but what is very interesting is that Japanese homeowners never got thrown out of their homes.

They had to pay down their mortgage into negative equity which did not feel very good, but the overarching effect is that basically by the early millennium, Japan became cheap, Japan became affordable for the next generation.

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Today in 2021, Tokyo is the only major city on earth where, if you work at a Starbucks making the average salary, you can actually afford to buy the average apartment within a 1 hour commute.  That’s impossible in London, in Shanghai, in Los Angeles or in Berlin.

It is very interesting that there was a reset that occurred by consciously inducing the bursting of the bubble economy for the bad effects that it had on society.

[Japan’s elites] are not afraid to go against the big vested interests, are not afraid to do something that is not popular but that in the long run is actually going to be right for the country.

The ruling elite in Japan is not afraid to shame big business into doing something that is right for the good of all the people.  And that’s what makes, in my opinion, Japan a form of capitalism that works.

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It is important to have a free market system, to have the creativity, the innovation, the price finding mechanisms etc…but it is also important to have a ruling elite that actually does the right thing to serve the purchasing power of the people, and that’s what here in Japan is happening very well.

Further Reading

Watch the first session here (REThink Tokyo; July, 2021)

Jesper Koll on Why Japan's Young Have Great Economic Futures (REthink Tokyo; September, 2021)

The New Japan Inc. (REthink Tokyo; September, 2021)

Tokyo Legacy (Hulu Japan; 2020) 

The Banker Behind Japan’s Rising Rates (Los Angeles Times; March 1990)

Japan at the Crossroads: Conflict and Compromise after Anpo (September, 2018)*

*This link is to an hour long podcast that talks broadly about Japan’s transformative economic growth from the 1950s through the 1970s.  It provides political context prior to and after Ikeda’s successful Income Doubling Plan which had been singled out by China in the early 2010s as what they desired to emulate at the time for their own ongoing economic transformation.

Click here for the Japanese version of the same session.