Why the U.S. Is Not Japan - Market Beat WJS

By Stephen Grocer

With concern that the U.S. economy is close to tipping back into recession, many investors are wondering if the U.S. is turning into the Japan of the 1990.

Certainly, there are similarities. Both economies faced massive asset price and credit bubbles, which left the private sector with a huge amount of debt when it burst. The deleveraging that followed in both countries also stymied growth and the effectiveness of their respective central banks to respond. And both the U.S. and Japan have witnessed an increase in government debt.

Despite these similarities, economist Paul Sheard over at Nomura, the Japanese brokerage firm, says that the U.S. is not Japan. The key differences:

“What marks Japan out since the bursting of its asset price bubble in 1990 is not that it faced deleveraging headwinds and balance-sheet adjustment challenges, and experienced a prolonged period of slow growth, per se. Rather it is that, as a result of a series of policy errors, the economy slipped into deflation and has stayed there, more or less, ever since. Japan made three key policy errors: it was extremely slow to recognise and then deal with asset impairment problems in the banking system, which “doubled down” on the stymieing of monetary policy; the central bank never adopted the “do whatever it takes” kind of monetary policy stance necessary to quash deflation (e.g., by engaging in sufficiently aggressive quantitative easing); and fiscal policy was put on a path of consolidation too early.”

Sheard goes on to conclude:

“The fact that the US has not experienced deflation and that its nominal GDP has resumed an upward trend is no guarantee that it will not do so in the future. Given that it is still relatively early post-crisis days, it is conceivable that the US could yet “turn into Japan” in that deflationary sense. But the fix-it (rather than forbearance) approach employed in the banking system and the Fed’s aggressive balance sheet expansion make such an outcome appear quite unlikely. Politics may make it more likely that the US follows Japan in putting the fiscal brakes on the economy too early, but that alone is unlikely to put the US on a Japan-style deflationary path.”