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US and Japan Post Bubbles

US and Japan Post Bubbles

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Published by: buckybad2 on Jan 04, 2011
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US and Japan Post Bubbles. (i) A SimilarFailure to Refinance the Banks. (ii) TheOpposite Structural Problem.
Report No. 331Andrew Smithers 23
April 2009
Smithers & Co. Ltd.
20 St. Dunstan's Hill, London EC3R 8HL
Telephone: 020 7283 3344 Facsimile: 020 7283 3345Web Site: www.smithers.co.uk E-mail: info@smithers.co.uk 
© 2009 Smithers & Co. Ltd
.This research is for the use of named recipients only. If you are not the intended recipient, please notify usimmediately; please do not copy or disclose its contents to any person or body, as this will be unlawful.Information and opinions contained herein have been compiled or arrived at from sources believed to bereliable, but Smithers & Co. Ltd. does not accept liability for any loss arising from the use hereof or makeany representation as to its accuracy or completeness. Any information to which no source has beenattributed should be taken as an estimate by Smithers & Co. Ltd. This document is not to be relied upon assuch or used in substitution for the exercise of independent judgment.
Postal Address: 20 St. Dunstan's Hill, London EC3R 8HLRegistered office: 66 Lincoln’s Inn Fields, London WC2A 3LHRegistered number: 2390516 England
© 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.

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