What Can The US Learn from Japanese Bubble
1. Easy monetary policy works, but there are risks in the exit.
The Federal Reserve’s quantitative easing measures over the past few years have allowed the U.S. economy breathing room to get back on its feet after the worst downturn since the Great Depression.
But there are risks that still lurk. If policymakers increase taxes too soon, or if they read the recovery prematurely, they could put the still-tentative U.S. economic recovery in real danger, Goto said.
“It’s difficult to measure whether this economic recovery has legs or not,” she said. “In hindsight, the BOJ had misread a lot of the performance of the Japanese economy, and had toyed with the idea of ending that gush of money. What Abenomics has been able to do is to turn back on the spigot,” she said, referring to the current Japanese Prime Minister Shinzo Abe’s plan to breathe life back into Japan.
“Japan should have been doing that a lot earlier, so that a comeback could have been easier,” Goto added. “We can learn from that."
2. You can’t divorce financial markets from ‘Main Street’s challenges.
Consider what has happened in Japan in recent months. After two decades of subpar performance, the stock market there staged a sharp rally last year, tacking on gains of about 50 percent in roughly 13 months. Japanese stocks took off because of an aggressive round of new easing that was the first part of Abenomics.
But what came next was an increase in the consumption tax in an effort to narrow the government’s vast budget gap. Japan's GDP took a nose dive, plummeting 6.8 percent in an annualized basis in the second quarter of this year. Underscoring that slide was lower corporate capital expenditures, which contracted 1.8 percent between April and June. Goto says the decrease was a sign that the tax move was probably premature, and highlights the importance of timing.
“The U.S. recovery is still very fragile, and it’s not permeating across the country,” she said. “It’s a market-driven recovery that’s not being reflected in household spending, in the periphery and nonurban areas. Small businesses are not recovering. It’s still a very regional thing.”
The Fed needs to take into consideration what’s going on in Main Street, and not just focus on the needs of the financial markets, Goto said.
3. Deflation could be the new normal, and that’s OK.
Undergirding a lot of anxiety surrounding the global economy, there’s significant concern that rather than runaway inflation, the U.S. could be about to enter a deflationary period, much like Japan did following its asset bubble crisis.
“Deflation is a loaded word,” Goto said. “People assume it’s bad, but I’d argue that, like debt, there’s good deflation and there’s bad deflation. Deflation could be the new normal in this global economy.”
Goto is talking about an ongoing decrease in prices and costs, something that would happen thanks to a greater integration of global markets. Globalization, and perhaps innovation, could pressure costs and prices in a way that would be characterized as deflationary. But that’d not necessarily be a bad thing, she says.
“The conversation about raising minimum wage in the U.S. could put upward pressure on prices, so purchasing power wouldn’t necessarily improve,” Goto said.
“Wage increases on the basis of inflation would not need to occur in a deflationary environment, assuming deflation is the new normal. That’s not necessarily a bad thing,” she added, noting her view is contrarian to most.
To that point, in the case of Japan, the deflationary years might not have been all that bad depending on your perspective.
In a recent interview for ETF.com's "Alpha Think Tank," Stratfor's Chairman George Friedman argued that, despite all its troubles, Japan managed to remain the world's third-largest economy through it all.
"The lost generation, in our mind, was not a lost generation," Friedman, one of the most respected geopolitical strategists today, said in the interview. "They were not interested in satisfying Western investors. Their debt is held internally. And their primary goal is to maintain full employment. And they did that while maintaining a very modest, but real growth rate."
"Given the size of the Japanese economy, even small growth rates are impressive," he added. "So our view of Japan is that this is a country that is going to be moving forward over the next five, 10 years fairly impressively."