That’s been the big question ever since the financial crisis started – is the U.S. going into a period of long term stagnation, like the Japanese did after their banking crisis in the 1990s? We’ve written quite a lot about this topic; my favorite piece on the subject is by our columnist Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, who said back in October, “the best hope for the U.S. is stagnation.” His view at the time was that we might be in for a much steeper and sharper correction. According to Sharma and many others, a decade of zero percent growth would actually be good news (remember, Japan is still the world’s second largest economy, even after their crisis). Sharma believed Hayek – that long forgotten Austrian economist who thought that major bubbles had to be corrected by Depression like periods of pain – might just be right.
But now that there are signs of some economic pick-up in both the U.S. and the world at large, it’s time to revisit the question of whether the U.S. is indeed turning Japanese—or whether we might pull out of this crisis sooner rather than later. I recently read an interesting research note today from RBC Capital Markets in London, which pointed out that as the financial crisis in the U.S. has progressed, the parallels with Japan’s post bubble period “appear to have deepened and multiplied.” The parallels, in case you’ve forgotten, would include: massive dysfunction in the banking sector, regulatory ineptitude, the scale of losses involved, the total collapse of bank lending, exploding budget deficits, and interest rates that are effectively at zero, meaning that central bankers have little room for any further maneuvering of monetary policy.
But the report also notes a number of very important differences in Japan and the U.S., the key one being the speed at which the crisis is unfolding. In Japan, bankers and government officials alike spent years trying to cover up the magnitude of the problem. The Japanese banking sector wasn’t really put back on its feet until 2005, fifteen years after the crisis began—that fact more than any other is what prolonged the pain. While there’s certainly there’s been plenty of dysfunction in dealing with the current financial crisis on Wall Street and in Washington, there has also, within a mere 18 months, been a fair bit of restructuring and ring fencing of toxic assets (there are some people, like economist Ann Lee, who actually believe that U.S. banks will emerge post crisis stronger and more financially dominate around the world – more on that in another post).
All this points to the fact that there are major cultural differences between the U.S. and Japan. America is still quite an open society, despite any protectionist posturing. In Japan, nearly two decades on from the crisis, minor foreign takeovers and outside investment into domestic companies still provoke hand wringing, and admitting fault still carries a stigma. If we want to stay on track to avoid our own Lost Decade, perhaps the best takeaway from the Japanese experience is that we should face up to our problems early and often – even when they seem insurmountable.