O/T - Economic Comparison, USA vs. Japan
"Greenspan's No Mieno"
Paul L. Kasriel
Head of Economist Research
The Northern Trust Company
February 9, 2001
There's a lot of speculative talk these days that the US may be entering a similar kind of economic swamp that Japan entered 11 years ago. I wouldn't deny that the "initial conditions" look similar - high degrees of private sector indebtedness, government surpluses, stock market bust, manufacturing recession and rising inflation. So why shouldn't the US suffer the same economic fate as that of Japan? Because Greenspan, the head of the Fed, is no Mieno, the head of the Bank of Japan (BOJ) back in 1990.
Let's go to the charts. Plotted in Chart 1 below is the BOJ's official discount rate (ODR) and the Nikkei 225 stock market average for the 1988-92 period. Notice that although the Nikkei peaked in November 1989, Mr. Mieno continued to raise the ODR after the Nikkei's peak. In fact, Mieno raised the ODR a cumulative 225 basis points between December 1989 and August 1990. Talk about beating a dead horse!
Chart 1
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Source: Financial Times, The Bank of Japan/Haver Analytics
It seems as though Mr. Greenspan "went to school" on Mr. Mieno's policy. As shown in Chart 2, US stock market capitalization peaked in August of this past year. The Fed had stopped raising its policy rate back in mid May, well before the peak in market cap. Also, in contrast to the Bank of Japan, the Fed already has dropped its policy rate by 100 basis points.
Chart 2
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So, Mr. Greenspan is not going to make the same mistake as did Mr. Mieno - to keep tightening after the stock market asset price bubble has been burst. But I wonder if he is going to make a different mistake - to ease aggressively before inflation has been whipped. Perhaps this is why Mr. Mieno kept raising the ODR - to keep from making this mistake. As can be seen in Chart 3, Japanese consumer inflation did not peak until the end of 1990.
Chart 3
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Source: Statistics Bureau, The Bank of Japan/Haver Analytics
Although the year-over-year percent change in US CPI inflation appears to have peaked in the first half of 2000, as shown in Chart 4, it is not clear to me, that its back has been broken. Inflation this year is likely to be less than it was last year, but an overly aggressive Fed this year could provide the fuel for another pickup in inflation next year. When the Fed no longer has the luxury of printing money at will is when we have start worrying about the US economy following in the footsteps of Japan's.
Chart 4
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Source: Bureau of Labor Statistics/Haver Analytics
Paul L. Kasriel
Head of Economist Research
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The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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