Why are analysts so confident that Japan's "Lost Decade" scenario won't happen to us? During 1990s, Japan's economic expansion came to a total halt. The country fell into a long period of stagnation: relatively high unemployment rates with low interest rates and GDP growth.
Our sub-prime crisis can be compared to Japan's exceptionally high land values and low interest rates that sparked the speculative, irresponsible borrowing of Japanese citizens, which in turn led to their asset bubble collapse.
Similarly to our government intervention, Japanese policymakers attempted several economic stimulus programs as well as bailouts. Japan went from having a budget surplus of 2.4% in 1991 to 4.3% deficit in 1996, and later 10% deficit by 1998, at which point their national debt to GDP ratio reached 100%. Are we there yet?
Later followed series of bank consolidations, which ultimately resulted in four national Japanese banks. In similar footsteps, JP Morgan Chase (NYSE:JPM) gobbled up distressed Washington Mutual (WAMUQ.PK), Wells Fargo (NYSE:WFC) grabbed Wachovia, Bank of America (NYSE:BAC) went on a buying spree, purchasing Merrill Lynch and Countrywide with their pending lawsuits, and a wave of regional banks got seized by the regulators across the country.
I guess few positive key points that sets us apart from Japan is that we have not fallen into a "liquidity trap", where the consumer stops spending and our savings rate shoots through the roof. Despite deteriorated credit and lack of lending, high end retailers like Nordstrom (NYSE:JWN), Tiffany & Co. (NYSE:TIF), and Guess? Inc. (NYSE:GES) still make record profits and continue to beat analyst estimates. Consumer confidence is still alive and kicking.
However, one financial aspect that does worry me is the possibility of a deflationary spiral in housing. For example, I bought a home in Texas in 2006 valued at $180,000. It is now year 2011 and my home is valued at $178,000. I fared better than most, but I did spend nearly $15,000 in repair costs until now, so I'm still in the red. What will I do if by year 2014 my house is STILL worth $178,000 or even lower? I'll walk away, and so will millions of others who will not want to waste money on repairs on a losing investment, hence causing a deflationary spiral. What is the point of homeownership if there is no price appreciation nor a positive rental cash flow?
With tuition costs rising on a quarterly basis, so do property taxes (at least in the state of Texas). Why would someone want to pay higher property taxes while their home value stays the same? I don't want to sound negative nor do I consider myself a pessimist by nature, but there are so many different complex issues that I just don't see a solution to in the near short term.
Please comment your opinions below as I'm interested to know your thoughts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.