• The government and the Federal Reserve have countered the crisis far more swiftly and aggressively than Japan's authorities did, with interest-rate cuts, tax rebates, TARP funding, and fiscal stimulus. "They have responded with size and speed," Wilcox tells CFO. Fed chairman and former academic Ben Bernanke is a student of the lost decade as well as the Great Depression in the United States, he points out. "The U.S. clearly has the advantage of having watched what happened in Japan," says Wilcox. "The specter of Japan has been hanging over people for a while."
• Real estate is a smaller share of total assets in the United States than in Japan. The decline in Japanese real estate values between 1991 and 2006 amounted to 225 percent of annual GDP. By comparison, a decline in U.S. real estate values from 2007 levels to the lowest level during the past few decades would amount to "only" 75 percent of GDP.
• Equity values as a percentage of GDP have fallen less in the United States than in Japan.
• U.S. banks have been quicker to write down their problem assets than Japan's were. In the 1990s, "many analysts were skeptical, to say the least, about the reported data from Japanese banks," writes Wilcox. Even today, he adds, "considerable suspicion remains that Japanese banks have large volumes of as-yet unreported losses lurking in their loan portfolios."
• U.S. corporations have lots of liquidity and relatively little debt. In Japan, corporations, not consumers, had to rebuild their balance sheets during the lost decade.
• The United States has faster population growth, which in the longer term means more demand for housing.
Increasing layoffs are worrisome, acknowledges Wilcox, though unemployment rates aren't as high yet as in the 1981 recession, which featured months of 10 percent unemployment. Still, "one of the great virtues of the U.S. economy is its enormous flexibility," he says — especially compared with Japan's rigid labor market of the 1990s. "It helps to be able to bend so that you don't break. We're taking some pretty tough body blows."
A Lost Half-Decade?
Wilcox and others remain confident that the United States will avoid a lost decade, if not a severe recession. Simon Johnson, a professor of entrepreneurship at MIT's Sloan School of Management and co-founder of The Baseline Scenario, a popular Website devoted to the financial crisis, predicts that the United States will endure at worst "a lost five years." On the other hand, Johnson believes a lost decade for the world economy, already in recession, is "quite possible," as he advised the Senate Budget Committee in January. "The world is headed into a severe slump, with…no clear turnaround in sight," he testified. The likeliest outcome is an L-shaped recovery, he said, "in which there is a steep fall and then a struggle to recover."
"I do think the U.S. will do relatively better," Johnson tells CFO. "I think the U.S. is pretty good at getting through the denial phase." In this regard, "partisan bickering [over the stimulus package] is a healthy thing," he says, because it reflects a willingness to openly grapple with the problem. While ultimately there may be some wasteful spending by the government, "the risks of inaction are greater."
Nouriel Roubini, a professor of economics at New York University who was one of the first to warn about the financial crisis, recently said that even if everything goes right — the banking cleanup, the fiscal stimulus, monetary easing — the U.S. economy is still in for a stiff, U-shaped recession. But if everything doesn't go right, the recession could change to a longer, L-shaped stagnation rivaling Japan's lost decade. "Even a U-shaped recession is ugly," said Roubini.
The big question is when consumers will feel like spending again. After several years when personal savings fell close to or below zero as a percentage of disposable income, people are keeping their wallets closed. The savings rate rose to 2.9 percent in the fourth quarter of 2008, compared with 0.4 percent a year earlier. November saw the biggest-ever decline in credit-card borrowing. Household debt is sky-high, housing and pension values are down, and wages are stagnant. Suddenly a decade doesn't seem like such a long time.
Edward Teach is articles editor of CFO.
Proceed with Caution
Those who say the U.S. economy will not suffer its own lost decade typically stress two reasons: one, U.S. authorities have learned from Japan's mistakes and will not repeat them; two, the United States will act far more quickly and aggressively to end the recession. Both reasons may indeed be correct, but some experts advise caution.
"[O]ne would be wise not to push too far the conceit that we are smarter than our predecessors," warn economists Carmen Reinhart and Kenneth Rogoff in a January working paper on the aftermath of financial crises. "A few years back many people would have said that improvements in financial engineering had done much to tame the business cycle and limit the risk of contagion."
In a December working paper on the U.S. bank-recapitalization effort, Takeo Hoshi and Anil Kashyap note that the government's "try-everything approach, without careful regard for implications, also bears an eerie resemblance to Japan's decade-long response to its financial crisis." The success of the recapitalization plan, they say, will lie in paying close attention to the details.
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