Macroeconomics never gives you more than an overview

Stephen Roach, Chairman of Morgan Stanley Asia has an op-ed in the New York Times (UPDATE: reprinted in Japan Focus) arguing that Japan’s post-bubble recession and fifteen year stagnation may well be what the US economy is facing now. I think he’s right about some of the dangers, but I think he’s leaving out some critical components. Macroeconomics never gives you more than an overview, and I think the situation in the US is much worse.

Roach writes:

Japan’s experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.

There are eerie similarities between the United States now and Japan then. The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.

Moreover, Japan’s central bank initially denied the perils caused by the bubbles. Similarly, it’s hard to forget the Fed’s blasé approach to the asset bubbles of the past decade, especially as the subprime mortgage crisis exploded last August.

In Japan, a banking crisis constricted lending for years. In the United States, a full-blown credit crisis could do the same.

The unwinding of excessive corporate indebtedness in Japan and a “keiretsu” culture of companies buying one another’s equity shares put extraordinary pressures on business spending. In America, an excess of household indebtedness could put equally serious and lasting restrictions on consumer spending.

I think the difference cited at the end — business spending versus consumer spending — gets close to the heart of my reservations about Roach’s comparison: Japanese consumption spending didn’t collapse in the wake of the bubble burst and Japanese were still, on average, strong savers in addition to being stock/property speculators. Japanese consumption remained relatively constant across the bubble1 There was significant speculative investment based on rising values, but I certainly don’t remember large numbers of foreclosures or personal bankruptcies.2 The speculative bubble in Japan was, I’d argue, more marginal to the economy because of the low use of credit cards and other forms of personal debt and the relative rarity of Japanese individuals using their existing property value as a basis for excess consumption.

The foundations of the Japanese economy — strong domestic consumption, strong exports — remained largely unaffected. Exports were hurt worse by the rising yen in the mid-90s, from which Japanese companies recovered by accelerating the outsourcing of manufacturing, cleverly avoiding the domestic labor shortage at the same time. In fact, consumption has remained stable in Japan to date, though the government’s periodic attempts to improve it by convincing people to draw down their savings haven’t borne much fruit.

The US economy, though, at this point is much more credit-dependent than the Japanese economy was in the 1990s, and the population is much more strongly tied to speculation. Take retirement, for example: Japanese saving for retirement is usually in the form of actual savings, or low-risk investments like bonds, whereas the US has shifted towards stocks and the sometimes-safer-sometimes-riskier mutual funds as the most common form of retirement assets. So a downturn in the stock market — one of the more obvious effects of credit tightening and economic slowdown — has both fiscal and psychological effects on many more US consumers. The real estate downturn in Japan has been slow and steady over the last fifteen years, with total land value in Japan declining by about 2% to 5% per year3, the real shock came at the very beginning when asset prices stopped rising. The real estate downturn in the US, on the other hand, seems to be much more severe and is much more closely tied to other sectors of the economy.

I also think that the US economy has resources which the Japanese economy did not: rising productivity and a rising population means continued growth in non-financial sectors of the economy, as long as the credit market doesn’t get too small; weakening dollar, making US exports, tourism and labor more attractive in international markets; flexible and mobile labor markets4 which have traditionally made sector shifts fairly quickly.

  1. look at the Japan Statistical Yearbook here, especially chart 19-5  

  2. I can’t seem to find a quick source on these, though  

  3. Here, particularly chart 15-19  

  4. perhaps too flexible and mobile, but that’s a discussion for another time.  

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