NEW YORK — If you want to spook an economist, ask him about Japan. He will tell you of a ghastly place whose undying stagnation devours even the strongest stimulus. Quantitative easing, bank recapitalizations and fiscal spending all failed to revive the world’s soon-to-be fourth-largest economy.
As the same measures fall flat in America, some are beginning to worry that the United States could be headed for its own lost decades.
Japan’s example is chilling: Nominal G.D.P. is lower than it was in 1992, and home prices are down 60 percent from their peak and still falling. Given the size of its bubble, Japan was due a painful deleveraging, but what is truly striking is the country’s inability to recover more than 20 years later.
Deflation is the main culprit. Prices for almost everything in Japan fall steadily and offer little incentive to buy today when it will be cheaper tomorrow. Deflation needs little help destroying an economy, but in Japan’s case it is abetted by aging demographics and lagging innovation: Japan’s working-age population started shrinking in 1995, and productivity growth ground to a halt shortly thereafter.
The odds of the U.S. repeating Japan’s experience are slim thanks to America’s smaller bubble, inflationary policy and rapid productivity growth — not to mention younger demographics. Though it is aging, America is in the peak of youth compared to Japan.
Both countries’ downturns started with bursting bubbles, but America’s housing bubble was less than half the size of Japan’s: in 1989, all the real estate in Japan was worth five times the country’s G.D.P. while the U.S. peaked at less than two. The stock-market bubbles were similarly skewed: Japanese stocks traded for 50 times earnings in 1989 while the S&P kissed 17 at its peak in 2007.
Despite America’s smaller bubble, its policy response dwarfed Japan’s. The Japanese did not recapitalize their banks for eight years after their bubble burst; the U.S. did it in less than a year. And if Japan manages to cast TARP in a flattering light, it makes Ben Bernanke look downright fetching.
Yes, the Bank of Japan did debut quantitative easing, but only after popping Japan’s bubble with high rates and then keeping them high for another two years, while real estate and the Nikkei plummeted. When they finally did ease, it came with an implicit message: This isn’t going to work, but we will try it, and if it does work, we will stop immediately. They have kept their word — whenever Japan’s economy shows even a nascent recovery, the Bank of Japan stops printing money in time to make it stillborn.
Federal Reserve Chairman Bernanke understands the importance of expectations and has shown that he will stop at nothing to keep America out of deflation. So far, it has worked: Despite the massive deflationary impulse of America’s real estate bust, the country remains in modest inflation.
Inflation, along with population growth, will put a floor under home prices in due course, and, in the meantime, consumption is solid and corporate profits are at a record high. America’s growth engine, if stalled, is not broken.
But Americans either don’t believe a recovery is coming or don’t expect to benefit much themselves. Consumer confidence continues to plumb the abyss, and long-term expectations are even gloomier — a recent Gallup poll showed more Americans than ever think future generations will have a lower standard of living than they enjoy today.
This sinking feeling is unfortunately corroborated by data: Real wages for most Americans are no better than in 1970. In this sense, American pessimism is long overdue — less a consequence of sudden Japanization than of the gradual erosion of America’s wage premium over the developing world. It isn’t just that Chinese and Indian workers are catching up; Americans are meeting them halfway.
But globalization isn’t zero-sum, and the market for truly innovative ideas is bigger than ever. These ideas are often born in the U.S., even now, and companies like Apple, Google and Facebook enjoy network effects on a global scale.
This is a key advantage over Japan, and America’s superstars will continue to profit mightily. Everyone else faces an uncomfortable reality: Unless you are one of the idea-slinging elite, then you are simply one of the many — competing for wages against not only countrymen but the entire world.
The fact is that America is at much greater risk of continuing its own uneven growth than reliving Japan’s lost decades. Turning Japanese is beside the point. For most, being American will be bad enough.
Sheldon Kasowitz and Ethan Devine are managers of a hedge fund focused on Asian markets.