Could the US go the way of Japan?
April 21, 2001
Most readers' gut reaction to this question will be a pretty resounding "No". But it's a question worth pursuing, not the least because of this: Had the converse question, "Could Japan go the way of the US?", been asked in 1980 when the US economy was mired in stagflation and high unemployment and couldn't do anything right, a typical, well-informed respondent might have whipped out a copy of Harvard professor Ezra Vogel's just published Japan as Number One and laughed into the naive questioner's face.
And for another several years he might smugly have stuck to that position as the Japanese economy and asset prices surged, Japanese companies - especially after the massive post-1985 yen revaluation - seemed unstoppable and took over East Asia, and Japanese banks occupied most of the world's top 10 positions.
Here are some of the impressive stockmarket numbers (TSE 225, end month) that accompanied the Japanese ascent to Number One:
August 1984 - 10,584 (Nikkei 225 breaks above 10 000 to stay)
February 1986 - 13,640 (reaches approximately its present level)
December 1986 - 18,701
January 1987 - 21,023
January 1988 - 23,719
January 1989 - 31,581
December 1989 - 38,915 (reaches its zenith)
And here are some of the depressing numbers that accompanied Japan's descent into decade-long stagnation to current economic basket case:
January 1991 - 23,293
January 1993 - 17,023
January 1995 - 18,649
January 1997 - 18,330
January 1998 - 16,628
January 1999 - 14,499
January 2001 - 13,843
As the Bank of Japan began to tighten interest rates in the fall of 1989, the asset bubble started deflating considerably faster than it had built up, then stagnation set in with stock prices - for nearly a decade - staying more or less at the level they had reached in 1986. Between stock valuations and property prices, the Japanese economy has lost about US$15 trillion in assets since 1990. And accompanying that, a moribund industrial structure was revealed which to date has defied fixing.
So, is that the handwriting on the wall for the US economy?
The Bank of Japan said in a November 2000 research paper: "As evidenced by the experience of Japan's bubble period, a bubble is not generated suddenly, but expands gradually. Therefore, it is important to deal with a possible bubble in a preemptive manner with a view to the future risk of inflation rather than to make a belated response only after inflation or the existence of a bubble visibly materializes."
It sounds like a thinly-veiled criticism of the US Fed which didn't start tightening monetary policy until Nasdaq and New York Stock Exchange prices early last year had gone sky high - only to come down with a bang in less than a year's time. Losses in market capitalization since March 2000 in the US amount to $4.5 trillion, just under half of US GDP. And just in case, like Greenspan, you'd point to productivity gains by the US economy that accompanied the market rise, please note that while US productivity grew by 12.9 percent from January 1997 to January 2001, Japanese productivity had grown by 18.2 percent from the start of 1987 to the end of 1990.
The most worrisome thing about the US economy at present is that corporate earnings have collapsed along with stock prices, cutting down on capital spending which - along with consumer spending (also, of course, hit badly by the stock market dive) - makes up for the major portion of economic growth.
Still, while there are noted similarities between the Japanese bubble period and deflation in the late '80s and early '90s and the US market price build-up and collapse in the late '90s through today, we regard it as very much less likely that the US will now go through a period of protracted stagnation as experienced by Japan in its past lost decade.
Aggressive Fed monetary easing (with a lot of leeway remaining) is one factor - but, of course, that didn't help Japan. Another, more important item, is the Bush administration's tax-cut policy. By contrast, Japan raised taxes in the mid-1990s (the Hashimoto effect). But most importantly, we are quite confident that the US government and politicians will soon come to realize that there are numerous regulatory factors and barriers (notably in telecommunications) that are dampening corporate earnings and whose removal should lead to new aggressive investment in the IT sector.
Just how important that is can be seen from the fact that nearly 80 percent of new US capital investment over the past five years went into IT and powered the sustained fast growth of the period from 1994 onwards. The New Economy is not dead. But it urgently requires a combination of monetary, fiscal and regulatory support to be revived. The US, we believe, has the political environment to effect that. Japan does not.
((c)2001 Asia Times Online |
