The U.S Is Not Japan

ZIRP (Zero Interest Rate Policy) has arrived in the US. And with it comes the inevitable comparisons with the last major country to employ the policy – Japan.

The low hanging intellectual fruit is to conclude that what happened in Japan will happen in the US. Japan employed ZIRP for years with little affect ergo the US will have the same experience. Japan struggled unsuccessfully to fend off deflation so the US will struggle unsuccessfully to fend deflation. But if we go beyond the sound bite and dig a little deeper we just might see that the US is not Japan therefore to assume an identical outcome is just too, well, sound-bitey.

For example, from a central bank perspective consider what Martin Wolf points out in his commentary today re deflation, Japan, and the US: “At this point, one might wonder why Japan has struggled with deflation for so long. I have little idea. But the explanation seems to be that the Bank of Japan did not wish to take such drastic measures (as the Fed has done) and the Ministry of Finance did not dare to force the point. Such self-restraint will not deter the US authorities.”

No doubt that the US consumer will need to drift closer to his/her Japanese counterpart as the deleveraging process continues to push Americans toward a more frugal future. But old habits are hard to shake, and with so much money being pumped into all facets of the US economy one should assume that the cutbacks in US consumer spending will never approach the levels in Japan.

While some fret over deflation, others worry that the flood of money will inevitably produce inflation. This is a justifiable concern. But that is a problem for another day. For today’s problem, the analogy that best fits is the one describing the firefighter and a house on fire – you don’t worry about water damage when the house is ablaze. Besides, once the credit crisis/deflation blaze is extinguished the Fed has ample policy options to address the more familiar risks of inflation.

The last point to make re the Fed and its announcement yesterday is their intention to purchase longer-dated assets to force rates lower, specifically in the mortgage arena. In this regard, it is worth noting that such action may have a powerful side effect – the pricing of illiquid, hard to value assets tied to mortgages. This aspect was part of the original TARP proposal (price discovery) and may result in write-ups of assets held on the banks' books written down to 20 cents on the dollar.

Investment Strategy Implications

With the TED spread sitting at 1.57% this morning, all due to LIBOR, the flood of money from the Fed coupled with anything resembling $70 or better in operating earnings for the S&P 500 in 2009 (current bottom up estimates sit at over $80) may be more than enough to draw investment funds out from under the mattress (3 month Treasury rates at 0.01% today) and into financial assets.

The past is prologue. The US is not Japan.

Comments

[HaavBline:]

There is no question that the US is not Japan. The real question is weather US will fare better than Japan in its 'lost decade' or worse. The two countries are vastly different in culture, political system, and financial strength.

As an American, I sure hope that US will be able to do much better. But one must not lost sight of some key US disadvantages comparing to Japan.

1. Japanese citizens always kept a high savings rate, not so US. They are much better prepared for a rainy day.
2. Japan maintained a large trade surplus throughout the lost decade. And its industrial strength was never in doubt.

But the US enjoy the unique (so far) ability to print unlimited amount of dollars without serious consequence. I prayed that we continue to enjoy this previlege for a long time.

2008 Dec 19 12:09 AM

[Kint:]

Well, Japan took, what, 7 or 8 years before they lowered their rates to 0? The Fed took 3 months. Clearly, the Fed is more decisive..

2008 Dec 19 04:48 PM

[jepittman:]

This is the crux of the comparison. Decisiveness. Japan took YEARS to write off/down their impaired assets. Banks today have taken writeoffs some consider ridiculous and will may eventually be written UP. Also, Japan is a very insulated society with virtuaally no immigration. The US is a multi cultured society with a very large immigrant population. This diversity is a powerful asset in an economic downturn. People from all over the world still want to come to America. This vibrant diversity of people is vastly different from unicultured Japan. Japan is a large economy but has not been a global economic engine for many years and will likely not be in the future.


On Dec 19 04:48 PM Kint wrote:

> Well, Japan took, what, 7 or 8 years before they lowered their rates
> to 0? The Fed took 3 months. Clearly, the Fed is more decisive..
>
>

2008 Dec 21 10:57 PM

[jcinsf:]

Have read many interesting takes on the Japan comparison to the current US economy--some for and some against. I can't say that I have my own head around it yet, but rather, I just look for ideas here and there that might show us the way (and, knock on wood, a profitable one) out of this mess. The best one I've come across (can't recall where) suggested that a key in Japan getting some, any, headway on their problem was complete transparency in the banking system. They did a kind of government audit of the banks and let everyone see what everyone was holding. Unknowns were removed. Questions answered. And afterward, money started moving again. It may not have solved their "deflationary" spiral but it certainly helped. I'm struck by how little government can do and do well, especially in a timely manner (the US is proving this again). But what they can do is establish a regulatory process to promote/demand transparency; and the sooner it gets implemented the better.

2008 Dec 22 05:55 PM