Interest rates close to zero and all the related issues are relatively new in the U.S. and Europe, but they’ve been around in Japan for two decades. So, many wonder if the U.S. is headed for Japan’s 20-years-and-running deflationary depression. And regardless, what does the Japanese experience tell us about living in this atmosphere?
The Japanese bubble economy was cruisin’ for a bruisin’, and its demise was aided by the Bank of Japan’s hike in interest rates, starting on May 31, 1989. Soon, exuberant real estate prices collapsed as did stock prices and economic growth nearly ceased. Lately, the earthquake and tsunami have added to Japan’s woes, at least on a short-term basis. Real GDP fell 1.3% in the second quarter from a quarter earlier at annual rates, following the 3.6% drop in the first quarter and the third quarter in succession to decline.
Similarities
There are a number of similarities that suggest that America is entering a comparable long period of economic malaise. The Age of Deleveraging forecasts a similar decade, at least quite a few years, of slow growth and deflation as financial leverage and other excesses of past decades are worked off. The recent downgrade of Treasurys by S&P parallels the first cut in Japanese government bond ratings in 1998, followed by S&P’s cut to AA-minus early this year and Moody’s reduction from Aa2 to Aa3 last month.
The recent slow growth in the U.S. economy—real GDP gains of 0.4% in the first quarter and 1.0% in the second—looks absolutely Japanese. Furthermore, the prospects of substantial fiscal restraint in the U.S. to curb the federal deficit is reminiscent of tightening actions in Japan in the mid- 1990s. The economy was growing modestly, but deficit- and debt-wary policymakers in 1997 cut government spending and raised the national sales tax to 5%. Instant recession was the result.
Big government deficits in recent years are another similarly between these two countries.
The U.S. net federal debt-to-GDP ratio is also headed for the Japanese level.
Japan’s gross government debt last year was 226% of GDP, far and away the largest ration of any G-7 country. All governments lend back and forth among official entities so their gross debt is bigger than the net debt held by non-government investors, and Japan does more of this than other developed lands. Still, on a net basis, its government debt-to-GDP is only rivaled by Italy’s and leaped from a mere 11.7% in 1991 to 120.7% in 2010. Is the U.S. far behind?
Japan, in reaction to chronic economic weakness, has spent gobs of money in recent years, much of it politically motivated but economically questionable, like paving river beds in rural areas and building bridges to nowhere. Is that distinctly different than the U.S. 2009 $814 billion stimulus package that was supposed to finance shovel-ready infrastructure projects when, in reality, the shovels had not even been made yet?
A key reason for the 2009 and 2010 U.S. fiscal stimuli and continuing deficit spending in Japan is because aggressive conventional monetary ease did not revive either economy. Zero interest doesn’t help when banks don’t want to lend and creditworthy borrowers don’t want to borrow. Both central banks found themselves in classic liquidity traps, so both resorted to quantitative ease, without notable success.
But Differences, Too
There are, then, many similarities between financial and economic conditions in the U.S. and Japan. Nevertheless, there are considerable differences that make Japan’s experience in the last two decades questionable as a model for America in future years. Note, however, that every time I visit Japan, I return convinced that I understand less about how they function than I did on the previous trip. I’m sure they behave rationally, but it’s a different rationale than in the West, or at least the one I understand.
The Japanese are stoic by nature, always looking for the worst outcome while Americans are optimistic—not as optimistic as Brazilians, but still prone to look on the bright side. Otherwise, why would the Japanese voters stand for two decades of almost no economic growth? Japanese are comfortable with group decision-making while Americans revere individual initiative, something the Japanese disdain. The nail that sticks up will be pounded down, is a favorite expression there. Perhaps because of this, the government bureaucracy in Japan is much stronger than in the U.S. while elected officials have less control and room for initiative.
Despite little economic growth, the Japanese enjoy high living standards.
And the Japanese are an extremely homogenous and racially-pure population. In a related vein, immigration visas don’t exist in Japan, so there’s nothing in Japan like the chronic shift of U.S. income to the top quintile. Nothing like the two-tier economic recovery that benefited top-tier stockholders in 2009-2010, but left the rest struggling with collapsing prices for their homes and high unemployment.
Fertility rates in Japan are about the lowest in the world and life expectancy is high. So the rapidly aging and declining population lack the innovation and dynamism of more youthful populations in the U.S. where immigration, legal and illegal, is high as are fertility rates.
