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The Japanization of the U.S.

It was Christmas Day, 1989, when the Bank of Japan raised the benchmark interest rate to 4.25%. The move was supposed to prevent an asset bubble and curb inflation. The result: the market crashed, the economy stagnated, and a debt crisis ensued. And in the better than 20 years since then, little has changed.

Japan has struggled through over two decades of weak growth and deflation. And the Nikkei index is still down something like 80% from its peak in 1989.

Nikkei 225 Index 1989 to 2011

There are parallels that can be drawn between Japan and the U.S. Japan’s problems were woven out of a frothy real estate market. And both countries have a threateningly high level of debt, over a decade with a flat stock market, and aging populations.

The similarities naturally lead to the question: are we facing a “Japanization” of the U.S.? Pimco’s Mohamed El-Erian believes that we can no longer assume that “Japan could not happen here”. And we should “regret the smug assertions that Japan’s ‘lost decade’ of growth was due to a combination of uniquely Japanese failings”.

As much as there are similarities that raise the question of whether our economy is headed for a ‘Japanization’, there are differences that raise the question of whether the U.S. can cope as well as Japan has. The majority of Japan’s debt is held in Japan, rather than by foreign creditors. And Japan’s characteristics make it better equipped to deal with a lagging economy. The Japanese people have a tendency toward conformity, and the country’s social cohesion has formed a cushion to soften years of a stagnant economy.

That means that a ‘Japanization’ of the U.S. economy would be harder to deal with because “the economic costs would be higher, the financial frailties greater, and the social consequences much more material”, according to El-Erian.

Our excesses have taken a toll. And we are now finding out what Japan has known for a long time… that bringing “back to sobriety an economy that overdosed on leverage, debt and credit-entitlement” is very difficult when there are “structural impediments to economic growth; when the political system undermines all attempts at reform; and when the global economy is weakening”.


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