What a Look Back at the Japanese Market Tells Us

Remember the Japanese and their banking problems? Japan is much different from the U.S., but this chart does not bode well for the U.S. stock market.

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Japan currently has the world's third largest GDP (on a purchasing power parity basis). Check out this article:

The Japanese economy was growing at a headlong rate, and companies were expanding and investing as never before.

The trouble was that much of this investment was being financed by an extraordinary boom in property and share prices. Property and shares were used as security for huge bank loans - and when the property markets and stock markets suddenly crashed at the beginning of the nineties the whole spiral of borrowing, asset price inflation and investment came to a full stop.

And despite many government initiatives to kick start demand, Japan's economy has remained fairly stagnant for the last six years. The stock market has been flat too, making it difficult for companies... to make profits.

Sound familiar? Defensive investors know that consumers will always need health care and consumer staples (e.g., Unilever products); however, investors looking for more than a 5 to 7% annual return are evaluating other options. After all, the key to getting high returns is determining the next high growth economic area and/or product.

U.S. companies realized earlier than most Americans that their growth would rely on non-U.S. countries. As a result, most major companies have shifted their emphasis overseas while lobbying for fewer trade restrictions. Now that the American consumer appears to be down and out, the question is whether the world economy can finally gain traction without the U.S. The most obvious way this decoupling will occur is if the American dollar is devalued, creating incentives for other countries to buy American products. If a Chinese yuan buys quite a bit of American goods, the Chinese consumer will feel flush and may start spending more, allowing the world economy to have more than one major source of income. A similar scenario can also play out with the Indian and Brazilian consumers. In fact, non-U.S. citizens must spend more in order to maintain economic stability.

Once you realize how small the American population is--only 5% of the world population--it's fairly easy to see that the most growth will come from abroad. As a result, trade restrictions will harm U.S. companies and their ability to expand and get their products into the hands of other countries' consumers. American companies that fail to achieve high growth rates will lay off workers in order to become more efficient. Thus, improving the job market means helping American companies gain more consumers, which means giving them more access to non-U.S. consumers. To achieve easy access to the international market, we have to negotiate with other countries and have fewer restrictions to encourage a free flow of ideas, money, and traffic. As much as we may hate to admit it, reducing trade restrictions and devaluing the American dollar may actually stabilize the world economy in the long run.

At the end of the day, what choice do we have, really? The American consumer is tapped out. Other countries' consumers must step up to the plate, and we need to encourage them to do so. In an era where the world economy requires more trust between countries, the latest failure of the Doha Development Round is an ominous portent. Thankfully, the failure of governments is not determinative.

The American corporations that succeed will be the ones who understand that the American consumer is but one small slice of a very large worldwide pie. In an era of cynicism, skepticism, and security fears, we must regain our confidence and look to maximize our international footprint through trade and superior products. The "Post-American world" can no longer be an amorphous, distant concept if we are to succeed--Americans must begin to see the world as one large marketplace in which they have the advantage because of their greater access to technology (Google, Yahoo, eBay, Intel, etc. - all made in the U.S.A.); the world's common language (English); an above average health care system (better health means more productivity); and entrepreneurship (it can take less than a week to set up a small business in California--for fun, compare that time with India and its small business rules/red tape).

I never thought I would advocate a weaker domestic currency, but sad times create sad consequences. The time has come to work harder and re-gain our stature in the world. When the non-U.S. buyers come, America must welcome them with open arms and the American attitude formerly known as optimistic. America is down, but as long as we have immigrants arriving and hoping for a better future, you cannot count America out. For better or worse, we are still the world's major repository for dreams. That's why I don't see a Japan-style economic morass happening in America--Japan is getting older and has never liked immigration. As long as we stay away from protectionism and encourage responsible immigration, we will do just fine.

Comments

[Mowog:]

The topic of mass immigration has been broached by some well-known politicians here in Japan. The reality of no children but near immortality is beginning to register in everyone's mind. Japanese emigrants (and their offspring) are allowed back, but it seems many of them (mostly Brazilian-Japanese) prefer to stockpile cash here then leave. I imagine more immigration will happen, but birth rates might start to increase as the pension system falters. Note that Japanese-foreign couples are more fecund, which might bring increasing acceptance for immigration as more half-Japanese (gads, that sounds so crass) are born and raised.

2008 Oct 12 08:15 AM

[Tedspick:]

But we are about to elect a president more interested in protectionism and higher business taxes and punishing investment so the suggestions for how we should move forward mentioned above appear to be unlikely

2008 Oct 12 08:55 AM

[flyfarmer:]

You just don't get it, do you? You, as well as other "experts", continue to treat the symptoms rather than the root cause. The consumer in this country is tapped out because american companies, with the governments blessing, have for 20 years outsourced jobs to other countries, at the expense of our own people. Yes, some benefit from the lower prices at Walmart, but they also lose with lower wages, since they now have to compete against the world's idea of a fair wage. We need to retain good paying jobs here in this country instead of trying to encourage more of the same. Ridiculous!!!!

2008 Oct 12 10:08 AM

[g7enn:]

The amount of corporate welfare is difficult to assess, but $3.3 trillion is missing from the US Treasury. American wages have been falling in real terms since about 1970. Most Americans have fallen for the mass corporate media brainwashing that transpires on American TV each day.

Japan aside, your assumptions about what Americans need to do comes right out of the corporate playbook. Basically you are advocating a kind of corporate fascism that has proved fashionable the past 30 years or so. Look where it has led to: Cheney and his neo-nazis and a busted financial system and people, along with a government focused on its military empire and not its people.

However, there is an individual playbook that says if the funds now going toward corporate welfare and our military empire, and our welfare system were made more efficient, money could be allocated toward education and motivating Americans to live healthier and more productive lifestyles unlike that which corporate TV now promotes. The result: Americans standard of living would rapidly rise.

The present corrupt Enron (1/2 the Congress was involved in Enron payoffs) written large Junta running American government needs to be removed and replaced with a honest efficient government working for the health, freedom and welfare of the people. I believe if these ideals were enacted America, within 10 years, could again lead the world, by example, in freedom, progress and spirit and be debt free.

Nothing will change until the present system collapses and Americans realize that this collapse is no accident but due to rampant corruption and mismanagement. Governments can run economically and efficiently and for the good of all, but not when they are controlled by the present corporate mafia who neither respect the Constitution nor the people they represent.

www.rense.com/general7...

2008 Oct 12 11:56 AM

[notsosmart:]

nobody knows squat.the insiders had a great run & their money is safe in swiss(secret) banks.

2008 Oct 12 12:09 PM

[CLH:]

Very good article Matthrew. Disregard the retarded comments of the left. They wouldnt do well under any system but at least they are eating now.

2008 Oct 12 01:22 PM

[Pretzel Logic:]

I keep hearing that "the American consumer is tapped out." I have to say that this may be true for many, there are also many savers in this country. I sell large ticket remodeling (35K-100K typical) and you would be surprised how many middle-class Americans pay cash for these purchases. My experience in the real world tells me the statistics may seem more dire than the reality.

2008 Oct 12 03:36 PM

[curious cat:]

flyfarmer: there was a time when almost all the goods in england were made in america. they stopped producing goods because it was more economical to import them. they raised the standard of living in this country by consuming our goods. we are now returning the favor, by raising the standard of living for people around the globe. sure, we have lost some jobs. so did the english. we have devalued our money. so did the english. they no longer rule the waves and we have learned or should have learned in the last fifty years that we can no longer project power around the globe, at least, not on the ground. the english learned to adjust their life styles and still found a way to continue paying royal family members a yearly stipend. we can probably manage to do the same for our democrats. hang in there.

2008 Oct 13 12:22 AM

[Rob Knapp:]

Protectionism has always delayed the inevitable. $ and jobs flows to the cheapest labor source. When we try to delay this cycle we waste our time and energy. Education and technology go hand in hand to create new higher paying jobs, Why does half of America believe that corporations somehow like laying off workers and moving overseas. They would stay if they could. Just look at GM if you want to see what happens when companies fail to compete in a global market place. Immigration is a solution to low cost labor. Investing in research and development is critical to building our economic future. Companies have to have low tax rates to encourage this type of investment in the future. Raise taxes and they will simply leave. What is it about simple economics that the democrats don't get? It is going to be a tough four years.

2008 Oct 14 09:33 PM