Back in 1988, I left a job on Wall Street to write for a living. Amazed that magazine editors would pay me to travel anywhere in the world so long as I could convince them there was a story to be told about the place, I began casting around for stories about places I wanted to go. The first place I wanted to go was Japan.
I proposed to a magazine editor a piece on what would happen in the world if Tokyo was destroyed by an earthquake. Of course, I had no idea what might happen if Tokyo was destroyed by an earthquake and no clue how anyone would even begin to guess. But I found one of these incredibly generous characters called magazine editors and asked one of them to send me to Tokyo for a few weeks to ponder the matter. And he did it.
The problem with this approach to the writing life, I soon found, is that at some point you need to write a story. What I had imagined more or less as a paid vacation in Tokyo soon became a sweaty search for an answer to what seemed even to me a preposterous question: What happens if this new center of global finance is wiped out?
I got lucky. It turned out that people inside Japanese government and finance had just begun to ask themselves the same preposterous question. An imaginative young geologist with Japan’s National Land Agency named Hideaki Oda had just finished a study in which he simulated a quake similar to the one that had destroyed Tokyo back in 1923 (and also in 1853, and in 1782, and in 1703 and in. . .).
He had estimated loss of both life and property in various scenarios: time of day the quake occurred, weather conditions, and so on. A smart Japanese economist named Kaoru Oda, who worked for the Tokai Bank in Nagoya, had used this report to estimate the earthquake’s economic consequences.
The details of both reports were shocking. The first Mr. Oda, in his most likely scenario, described 152,000 deaths, 800,000 collapsed buildings, and about $1 trillion in property damage.
The second Mr. Oda forecast a dramatic rise of five percentage points in interest rates, a collapse in economic growth and in asset prices -- all in the U.S.
That was the general picture that emerged from these mental exercises: When the next big one hit, the Japanese would suffer a great human loss but the financial pain would be felt mainly abroad, after Japan sold its foreign assets to pay for its reconstruction.
A nation living with a perpetually high risk of natural catastrophe had in effect bought itself a massive catastrophe insurance policy. The unwitting seller of that policy had been us.
There was a lot more in both reports than that, and I won’t rehash it all here. But it’s interesting to compare what was imagined might happen 23 years ago with what actually is happening now.
The real and imagined Tokyo earthquakes are different events: The real earthquake, though more severe than the imagined one, dealt Tokyo only a glancing blow; the financial losses caused by the real quake so far don’t appear to be anything like $1 trillion; and back in 1988 no one considered the possibility of nuclear disaster.
The immediate financial-market response to the actual event is also, at best, a first cousin to the scenario imagined back in 1988. In the fictional catastrophe, the yen rose dramatically as the Japanese government and private insurers sold all sorts of non-yen assets to buy yen, and it is rising now, for instance.
But in the imagined scenario, the Japanese stock market rose in anticipation of a massive stimulus and a glorious economic future. Just now it is collapsing, spectacularly.
There’s a reason for the difference: The market has a lot less faith now than it did in 1988 in Japan’s economic future. The single biggest financial question to arise from the imagined scenario was: Just how screwed will the U.S. be when Japan asks for its money back? It now has been joined by another: just how screwed will Japan be when it reveals that it not only wants but needs its money back?
That is what leaps out at you from the comparison of the real catastrophe with the imagined one: how different the context has become. Back in 1988, it was hard to imagine Japan working from anything but a position of strength: high savings rates, massive trade surpluses, a booming economy and stock market. There was no question then that Japan would bounce back. Today, Japan feels almost doomed.
The ratio of Japan’s government debt to its gross domestic product (more than 225 percent) is the highest in the developed world, almost double that of the next-worst basket case: Greece. The Japanese government still owns about $900 billion of U.S. Treasuries, but less honestly. In effect, the Japanese government has borrowed huge sums from its own, increasingly strapped people and used some of that money to fund U.S. Treasury purchases.
The Japanese population, aging and shrinking, is saving less and less. The historically biggest buyers of Japanese government bonds -- Japanese government pension plans -- have recently become net sellers. The country has run through five finance ministers in the past two years, and in ways that suggest the job has become a lot less appealing. (One left for health reasons, another appears to have committed suicide.)
The Dallas-based hedge fund Hayman Advisors, which has been betting that Japan will eventually need to default or restructure, has estimated that a mere three percentage-point rise in interest rates would leave the government using all of its tax revenue simply to service its debt.
Even before the earthquake, Japan, to balance its books, was probably going to need to sell a lot of government bonds to foreigners. And those foreigners probably were going to demand a far higher rate of interest than Japanese government pension plans do to hold them. That rate of interest just went up.
In 1988, Japan had the resources to cover a far more expensive catastrophe. The big question was what financial effect the event might have on the people who had grown dependent on Japanese capital.
The financial world felt unstable, and the situation between America and Japan unsustainable: That was the reason there was any interest in the first place, to an American magazine editor, in the consequences of the next big Tokyo earthquake. Now the Japanese, too, are straining to preserve a system that is effectively broke.
As fragile and unstable as the financial world looked back in 1988, to those who tried to imagine the worst, it looks even less stable and more fragile today. And the worst hasn’t even happened. For any young magazine writer looking for a free trip to Japan here’s a tip: The next great Tokyo earthquake is still long overdue.
(Michael Lewis, most recently author of the best-selling “The Big Short,” is a columnist for Bloomberg News. The opinions expressed are his own.)
To contact the writer of this column: Michael Lewis at firstname.lastname@example.org
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