Japan's 'lost decade' provides lesson for America

U.S. politicians and Federal Reserve officials are attempting to put the economy back on track with aggressive deficit spending and severely reduced interest rates. Nearly 20 years ago, Japan tried the same approach, with little success. What happened in Japan's "lost decade" provides an insight into what Americans may expect in the coming years.
After a credit-induced boom in the late 1980s, Japan's stock and real estate markets tumbled. From a high in December 1989, the Nikkei Index fell in less than a year by 46 percent. Within two years, it had fallen by 59 percent. Following the crash, loan defaults soared - sound familiar? - and Japan's Urban Land Price Index began an unbroken decline that continues to this day. As of the latest measure, 2008, the index was well under half its 1991 level. Japan's economic growth also stalled, averaging less than 1 percent per year from 1991 to 1999 - and actually declining in 1993, 1998 and 1999. The rate of
The Japanese government responded with a succession of deficit-driven stimulus policies, with a similarly aggressive monetary policy from the Bank of Japan. While Japan approved temporary tax cuts, the primary emphasis was on increased infrastructure spending. The small seaside city of Hamada, for example, gained its own bridge to nowhere, along with a new highway, university, prison and art museum,
among other government-funded projects. Rural Japan is littered with recently built infrastructure, warranted by hopes of job creation, not necessarily constituent need.
Consequently, the government's 1990 surplus, equal to 2 percent of gross domestic product, plunged into the red and increased as the decade wore on, hitting 7.4 percent of GDP by 2000. Government expenditures also increased during the period, rising from 30.5 percent of GDP in 1990 to 38.6 percent in 2000.
The Bank of Japan's strategy was simply to lower interest rates, holding rates at 1 percent or less for most of the 1990s. The central bank's discount rate still sits at 0.1 percent, as it has for almost a decade. Confidence in the Japanese economy had fallen to such a large degree, however, that the interest-rate cuts had no apparent effect on employment or economic activity.
By the end of the 1990s, Japan's economy was in even worse shape than it was after the crash in 1990, and the "lost decade" now is stretching into two lost decades. The only prize the strategy achieved for Japan was the largest national debt in the developed world: 200 percent of GDP.
The United States today stands in an economic position similar to Japan's in the early 1990s. The federal government's and Federal Reserve's response to date is also strikingly similar to Japan's, in both magnitude and substance.
If anything, American leaders are being even more aggressive than Japan's leaders were. The Obama administration's projected deficits for the next 10 years, $9.1 trillion, would be more than 5 percent of GDP for the entire decade, while Japan's was 4 percent for the decade following the 1990 collapse. On the monetary side, the cost of borrowing is now cheaper here than it was in Japan in the 1990s, although both now sit at close to 0 percent, with little room to go any lower.
If one is to go by the Japanese experience, Americans should expect little from the current stimulus policies.
Even a prominent proponent and architect of the Japanese approach, Richard Koo - chief economist of Nomura Research Institute, Tokyo, and a former New York Fed economist - argues that the best the United States can hope for is avoidance of a worsened recession.
With the likely limp and drawn-out recovery will come inevitable deficits, a larger government sector, an expanded debt, and interest burdens that will plague American taxpayers far into the future.
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US risks following Japan's example of stagnancy

By TOM RAUM (AP)
WASHINGTON — Heavy government stimulus spending and near-zero interest rates did little to end a "lost decade" of stagnation and mushrooming debt in Japan. Some economists and lawmakers say the U.S. may wind up following the same trajectory.
Despite early signs of recovery and a strong U.S. stock market rally, fears persist that the failure to generate new jobs or ignite more consumer spending could drag the economy back into recession, or result in a protracted Japan-like period of poor economic and stock-market performance.
Japan is President Barack Obama's first stop on a tour of Asia beginning Friday — and the gloomy world economy will be high on the agenda. Both Japan, beginning in the 1990s, and the U.S., in the most recent economic crisis, had credit and housing bubbles and both engaged in huge amounts of overborrowing leading up to sharp economic downturns. And both used historically low interest rates and government stimulus spending to try to lift their economies out of the ditch — with questionable results in Japan.
"It seems to me we are on the exact same path that the Japanese took in their `lost decade' — of running up huge government debts, of not stimulating growth and at the end of the decade having this massive debt," said Kansas Sen. Sam Brownback, senior Republican on Congress' Joint Economic Committee.
Others cite differences in the American and Japanese economies and business cultures to argue that things here are different and less susceptible to a prolonged period of economic lethargy. While the debate rages, both sides agree Japan's painful experience offers the U.S. a lesson of how attempts at stimulus can go horribly wrong.
In the 1980s, Japan's factories were humming and the country seemed on track to surpass the United States as the next global economic superpower. Japan's banks were the largest in the world by market capitalization. Real estate and stock prices soared. Japan was buying up large chunks of the United States.
Japan's bubble economy burst in 1990 and it lapsed into a lost decade that is fast becoming two lost decades. Struggling to regain its economic footing and manufacturing competitiveness, Japan is about to lose its standings as the world's second-largest economy and be replaced by China.
David Wyss, chief economist for Standard and Poor's, said a drawn-out period of economic stagnancy like Japan's is a possibility.
"But I don't think it's as likely over here. For one thing, one of the problems in Japan was the demographics. And we don't have the problem of a declining population to deal with, although the labor force is going to slow down considerably as soon as the baby boomers retire," Wyss said. He predicted "a very sluggish recovery here."
Japan's older population means more government social security spending and a movement by older Japanese away from saving towards spending.
One other difference is that Japan's crisis was largely created by corporate debt excess, much of it borrowed against property with inflated prices, rather than personal debt and housing-market failures as in the United States.
Stock prices bottomed in Japan in 2003 until hitting an even lower low in 2008. Japan's Nikkei stock index, now just under 10,000, still stands about 75 percent lower than where it was 20 years ago.
Some analysts say that Japan's example doesn't show how stimulus can be ineffective so much as it shows the dangers of spending too little up front — or withdrawing it too quickly.
Japan protracted its recession twice by unwinding stimulus measures too early — in 1997 and in 2000 — the International Monetary Fund said in a recent report on Japan's lost decade.
"An important lesson from Japan is that green shoots do not guarantee a recovery, implying a need to be cautious about the outlook today," the IMF said in a reference to stimulus measures that the Group of 20 major economies now have in place. Finance ministers of G-20 nations agreed last weekend to keep stimulus measures in place for now, helping to fuel a stock market rally earlier in the week.
Years of expensive post World War II spending on roads, dams and other projects, together with government stimulus spending to combat recessions, have left Japan with a national debt twice the size of its $5 trillion economy, the biggest deficit of any major economy.
The U.S. national debt of $12 trillion, by contrast, is approaching the size of the overall economy, $13.6 trillion as measured by the GDP. As staggering as that is, the ratio is half that of Japan's.
Worrisome for both Japan and the U.S. is the fact that interest rates are exceptionally low right now, in part because of action by central banks in both countries. That makes servicing the national debt less expensive than it would otherwise be. But as interest rates begin to rise again, as they inevitably will, the costs of paying interest on new government bonds issued to cover deficit spending will soar.
The U.S. may already be in a lost decade — and not realize it yet.
Some 7.3 million jobs have been lost since the recession began in December 2007. Just getting back to even and keeping pace with population growth could take many more years.

Central banks 'experimenting' to counter deflationary pressure
A major challenge for Japan at present is to find ways to counter the deflationary pressure arising from further rises of the yen's exchange rate, not only against the U.S. dollar itself but also against the currencies of China and other emerging Asian and Latin American economies that manage their exchange rates against the U.S. dollar.

It is Japan we should be worrying about, not America
Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

BOJ forecasts 3 years of deflation -outlook report

TOKYO, Oct 30 (Reuters) - Japan will experience three years of deflation and the pace of price declines will slow only gradually, the Bank of Japan said in its half-yearly outlook report, effectively pledging to keep interest rates near zero at least until 2011.
"The BOJ will aim to maintain an extremely accommodative financial environment," the central bank said in the report, reitering that it will provide steady support for the economy to get it back to sustainable growth.
The BOJ releases long-term economic and price forecasts in April and October that form a basis for its monetary policy decisions. It reviews the forecasts every January and July.

Falling Prices in Japan Feed Deflation Fears

TOKYO (Reuters) — Japanese wholesale prices fell at their fastest rate since 2002, March figures showed on Monday, as weakening domestic demand on top of falling commodity prices led to worries about deflation.
With interest rates already nearly zero, analysts say the Bank of Japan has limited weapons to fight deflation in the country’s worst recession since World War II.
The Bank of Japan “has reached its limit in terms of conventional monetary policy moves,” said Norihiro Fujito, general manager at Mitsubishi UFJ Securities.nytimes.com

The Week Ahead Asia Pacific: Light Data Week with Markets Looking West
(CEP News) Asia-Pacific markets are expected to react to outside factors such as stimulus plans and U.S. corporate earnings next week amid a light economic data schedule.
The major release out of the region will be Chinese first quarter GDP on Thursday (Wednesday night EDT). First quarter GDP is expected to climb 5.9%, following a 6.8% increase in the previous quarter.
Economists at DBS are optimistic that economic growth will surprise to the upside. Persistent improvements in manufacturing PMIs are pointing to an even better 6.5% increase, they said.