© 2009 Smithers & Co. Ltd. 1
US and Japan Post Bubbles.
Economic forecasting consists, for the most part, in analysing similartimes in the past and extrapolating from them. As, mercifully, similar conditionsto those ruling today are rare, this makes current economic forecasts even morethan usually prone to error. While bearing in mind
this important proviso, welook at the nearest recent equivalent to today’s troubles, which is Japan after1990.
The similarities between Japan’s asset bubbles and debt expansion in therun up to the post-1990 crash and the US recently are marked. The policymeasures needed to mitigate the consequent loss of output and to restore growthare also similar.
The required measures are major fiscal stimuli and large injections of equity into banks. The fiscal steps are being taken but, sadly, there seems to be asimilar reluctance in the US today to refinance the banks as there was in Japan inthe 1990s. As an expansion of bank lending is needed for growth but not forstability, this risks stagnation more than continued economic decline.
The differences between Japan in 1989 and the US today are, however, just as marked as the similarities. While Japan’s private sector debt problemswere limited to the corporate sector, those of the US today are common to bothhouseholds and companies. In the latter case they are all the more seriousbecause they are still underrated.
Another great contrast is between the high savings’ rate of the householdsector of Japan and its subsequent fall, and the low current savings’ rate in theUS and its likely rise.
Japan’s structural problem of over-investment has been reduced, but farfrom eliminated. This has left its economy particularly exposed to cyclicaldownturns and accounts for the country’s exceptional vulnerability to the currentworld recession.
The US has the mirror image of this problem. It needs to raise itshousehold savings rate, reduce the government deficit and achieve a currentaccount balance.
A rise in household savings is highly likely. But the other two adjustmentswill be more difficult, both because they will be politically unpopular andbecause they do not depend solely on US policies, but on the fiscal, monetaryand exchange rate policies of trade surplus countries.