US risks following Japan's example of stagnancy

[November 12, 2009]  WASHINGTON (AP) -- Heavy government stimulus spending and near-zero interest rates did little to end a "lost decade" of stagnation and mushrooming debt in Japan. Some economists and lawmakers say the U.S. may wind up following the same trajectory.

Despite early signs of recovery and a strong U.S. stock market rally, fears persist that the failure to generate new jobs or ignite more consumer spending could drag the economy back into recession, or result in a protracted Japan-like period of poor economic and stock-market performance.

Japan is President Barack Obama's first stop on a tour of Asia beginning Friday -- and the gloomy world economy will be high on the agenda. Both Japan, beginning in the 1990s, and the U.S., in the most recent economic crisis, had credit and housing bubbles and both engaged in huge amounts of overborrowing leading up to sharp economic downturns. And both used historically low interest rates and government stimulus spending to try to lift their economies out of the ditch -- with questionable results in Japan.

"It seems to me we are on the exact same path that the Japanese took in their `lost decade' -- of running up huge government debts, of not stimulating growth and at the end of the decade having this massive debt," said Kansas Sen. Sam Brownback, senior Republican on Congress' Joint Economic Committee.

Others cite differences in the American and Japanese economies and business cultures to argue that things here are different and less susceptible to a prolonged period of economic lethargy. While the debate rages, both sides agree Japan's painful experience offers the U.S. a lesson of how attempts at stimulus can go horribly wrong.

In the 1980s, Japan's factories were humming and the country seemed on track to surpass the United States as the next global economic superpower. Japan's banks were the largest in the world by market capitalization. Real estate and stock prices soared. Japan was buying up large chunks of the United States.

Japan's bubble economy burst in 1990 and it lapsed into a lost decade that is fast becoming two lost decades. Struggling to regain its economic footing and manufacturing competitiveness, Japan is about to lose its standings as the world's second-largest economy and be replaced by China.

David Wyss, chief economist for Standard and Poor's, said a drawn-out period of economic stagnancy like Japan's is a possibility.

"But I don't think it's as likely over here. For one thing, one of the problems in Japan was the demographics. And we don't have the problem of a declining population to deal with, although the labor force is going to slow down considerably as soon as the baby boomers retire," Wyss said. He predicted "a very sluggish recovery here."

Japan's older population means more government social security spending and a movement by older Japanese away from saving towards spending.

One other difference is that Japan's crisis was largely created by corporate debt excess, much of it borrowed against property with inflated prices, rather than personal debt and housing-market failures as in the United States.

Stock prices bottomed in Japan in 2003 until hitting an even lower low in 2008. Japan's Nikkei stock index, now just under 10,000, still stands about 75 percent lower than where it was 20 years ago.

Some analysts say that Japan's example doesn't show how stimulus can be ineffective so much as it shows the dangers of spending too little up front -- or withdrawing it too quickly.

Japan protracted its recession twice by unwinding stimulus measures too early -- in 1997 and in 2000 -- the International Monetary Fund said in a recent report on Japan's lost decade.

"An important lesson from Japan is that green shoots do not guarantee a recovery, implying a need to be cautious about the outlook today," the IMF said in a reference to stimulus measures that the Group of 20 major economies now have in place. Finance ministers of G-20 nations agreed last weekend to keep stimulus measures in place for now, helping to fuel a stock market rally earlier in the week.

Years of expensive post World War II spending on roads, dams and other projects, together with government stimulus spending to combat recessions, have left Japan with a national debt twice the size of its $5 trillion economy, the biggest deficit of any major economy.

The U.S. national debt of $12 trillion, by contrast, is approaching the size of the overall economy, $13.6 trillion as measured by the GDP. As staggering as that is, the ratio is half that of Japan's.

Worrisome for both Japan and the U.S. is the fact that interest rates are exceptionally low right now, in part because of action by central banks in both countries. That makes servicing the national debt less expensive than it would otherwise be. But as interest rates begin to rise again, as they inevitably will, the costs of paying interest on new government bonds issued to cover deficit spending will soar.

The U.S. may already be in a lost decade -- and not realize it yet.

Some 7.3 million jobs have been lost since the recession began in December 2007. Just getting back to even and keeping pace with population growth could take many more years.

[Associated Press; By TOM RAUM]

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