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Monday, June 20, 2011
Disaster shines light on wisdom of renting in a debt-laden world
Special to The Japan Times
The destruction wrought by the Great East Japan Earthquake has started to appear in statistics in its full force.
New car sales in April fell 47.3 percent from a year ago to 185,673 units, while gross domestic product for the January-March quarter contracted 0.9 percent from the previous quarter, representing an annualized fall of 3.7 percent.
The economy was in fact growing from January up to early March, but the huge impact of the March 11 earthquake and tsunami in the remaining weeks of the month pushed the whole quarter's growth into negative territory.
More problems are likely to surface in the coming months, including a rise in nonperforming loans at banks in disaster-hit areas and — on the flip side of it — a rise in the debt problems of people who lost their houses to tsunami after buying them with bank loans.
Going into debt to buy a home was typical practice for salaried workers during Japan's postwar economic surge. It was based on two conditions — one, that the nation will not be hit by serious natural disasters or war, and two, that the nation will experience inflation and wages will rise faster than the inflation rate.
Today, Japan remains unable to pull out of its deflationary trend even as the central bank maintains a zero-interest-rate policy. This is because the relatively high prices of goods and houses are being adjusted lower to stay in tune with international levels.
Amid its tight fiscal condition, there are no prospects yet of a second extra budget for fiscal 2011 being enacted to finance postdisaster reconstruction. Behind the fiscal problems are changes in Japan's demographics, which show that the rapidly graying population is causing a sharp increase in social security expenses.
In a sense, the March 11 catastrophe has underlined the fact that the kernels of wisdom we gleaned from that era of rapid economic growth after the war just don't apply any more.
People tend to think that debt-financed housing is part of Japan's DNA. But in the days before World War II, it was more common for people to rent their houses.
Take, for example, an Imperial University of Tokyo professor in Natsume Soseki's novel "Sanshiro" who is depicted as living in a rented house. Living in rental housing in the time period the novel was set in made sense for two reasons.
One is the wisdom of sticking with a healthy form of household accounting management that ensures the cost of each month's expenditures will be borne by the income provided each month.
I do not think it was impossible for an Imperial University professor to get a loan at the time. It's just that the character apparently was well aware of the risk of owning debt-financed assets.
The second reason is that you change houses in accordance with changes in your family structure. If you live in a rented house, you can cope flexibly as you go from living independently to marriage, child-bearing and the raising of your children, and ultimately to retirement. These nuggets of wisdom, however, were forgotten as the nation evolved through a cycle of rapid growth, inflation and rising wage levels.
People need to heed the dangers posed by natural disasters to household finances. Assets held by a family can be divided roughly into two categories — financial assets, such as savings, securities and government bonds — and nonfinancial assets, including houses, land and furniture.
Debts are negative assets. Your net assets are what remains after debts are subtracted.
The risk of holdings such assets varies according to the changes in economic conditions. Each household needs to have a firm grasp on its assets and debts, and adjust its components and balance them in accordance with economic conditions.
To facilitate such adjustments, the asset/debt transaction markets need to be expanded further.
One typical example of the risk of holding a financial asset is stock prices. Tokyo Electric Power Co. shares were above ¥2,000 for over a decade before the accident at the Fukushima No. 1 nuclear power plant. Now they're worth around ¥300.
However, Japan's market for real estate transactions — a typical nonfinancial asset — is still in a very premature stage. Japan still lacks a full-scale market that, as in the United States, packages housing assets and debts into items that can be traded.
A more active market for housing trade would set clear prices for real estate held by individuals, allow quick adjustments to be made to the assets being held, and also make international price comparison possible.
The multiple disasters of March 11 have exposed Japan's weak crisis-management capabilities, but government and private-sector leaders are using the excuse that the scale was simply beyond all reasonable expectations.
Households, businesses and governments swamped by heavy debts should take this occasion to reassess the risk of holding debt-financed assets and make future plans so they can cope with further changes in the environment that will come with globalization.
Teruhiko Mano is an international economic analyst.