Comparing Japan’s “Lost Decade” to the Current US Recession
There have been many comparisons between the US and Japan of the 1990s. This article attempts to shed some light on the issue of whether the US is heading towards a “lost decade”.
The mainstream point of view:
After the Japanese asset price bubble burst, Japan sank into an era of recession, falling stock prices (the Nikkei fell over 60%), falling land prices (over 70% by some estimates) and relatively high unemployment. Japanese authorities waddled and did not take effective action soon enough. Confidence was broken and the economy languished. Economic expansion came to a total halt in Japan during the 1990s. The Japanese authorities spent large amounts of money on fiscal stimulus, which was largely ineffective. Deflation was a big problem.
http://www.guardian.co.uk/business/2008/sep/30/japan.japan
The numbers point of view:
Japan did not truly experience much deflation during the 1990s as the annual price deflation never exceeded 0.9% for one year. “Nominal returns on savings have been low but positive in real terms – in other words, better than in the United States since 2000.”
Economic stagnation mostly resulted from demographics. Due to the aging and shrinking population of Japan, its GDP growth is stagnant, when measured against other developed countries in per capita terms Japan’s overall performance has been moderate rather than bad. While total real GDP is a good measure of the economic power of a country, GDP per capita is a better measure as it is adjusted for changes in population.
http://www.iht.com/articles/2008/12/30/opinion/edbowring.php
Japanese authorities also eased rates early on (http://www.economist.com/finance/displaystory.cfm?story_id=11964819) but that was ineffective due to the liquidity trap. So don’t expect too much in effects from the near-zero rates the Federal Reserve is currently targeting.
It is interesting that there are two totally contrasting points of view on one issue with even the same numbers.
However, as traders and investors, we can still draw some useful observations from Japan’s “lost decade”:
1. It is widely agreed that lack of transparency and willingness to recognize bad debts prolonged the Japanese recession. US banks have been more straightforward about the problem, writing off debts early. US authorities have also taken steps to ease the alleviate the pressure on banks. Inefficiencies may occur with the current rush to bailout banks (rumors are spreading about how some Wall St firms paid out bonuses with TARP money), but overall the US financial sector should recover faster than their counterparts in Japan did and become stronger than before (and perhaps more prudent with lower leverage).
2. Fiscal stimulus plans that attempted to prop up “zombies” (companies that were unprofitable and would not be able to survive without “life support”) were costly and may have been rather ineffective.
3. Bubbles take time to deflate. Despite lowering rates relatively early on, Japan was not able to prevent the decline in asset prices. This is normal as overvalued asset prices must come back to earth sooner or later. And the bubble in the US may have not been smaller than the one in Japan.( http://www.economist.com/finance/displaystory.cfm?story_id=11964819)
In any case, people will have a more realistic mindset in the coming years and we should not expect the fat returns of the past any time soon. A bubble that pops takes time to deflate, and its impacts will be felt for a while.
4. And finally, stimulus plans should not be viewed as a magical wand. According to this article (http://www.iht.com/articles/2009/02/06/asia/japan.php), the effects of Japan’s stimulus is highly contested and the best case for it is that it moderated a downturn in the economy. It was eventually the strengthening world economy that led exports and a Japanese recovery.
Nevertheless, we should keep in mind that the next bull market is always “around the corner”, and instead of getting caught up in the gloom, we should actively seek opportunities.
This was a guest post by StockTradingToGo Community member Allen. View more posts from this author.
