MyDD :: Does Japan's Fall Presage Our Own?

Does Japan's Fall Presage Our Own?

by Charles Lemos, Mon Feb 16, 2009 at 02:50:48 AM EST

Japan's GDP Contracts -12.7%
The government of Japan reported its GDP numbers for the 4Q08. Japan's real gross domestic product shrank at an annual rate of 12.7 percent from October to December. This marks the third consecutive quarter of economic contraction in the world's second largest economy. The Japanese economy is facing a declining export sector that had previously kept the economy afloat and it continues to be plagued by lackluster consumer spending and anemic business investment. The downturn is the most severe in Japan since the oil shocks of 1973-74. More from the New York Times.

The numbers are mind numbing. While the Japanese case is not wholly analogous to our own, there are some takeaways. One of the biggest mistakes that Japanese policy makers have made is to prematurely withdraw their fiscal stimulus in vain attempts at budgetary discipline. These fits and starts have simply put decimitated the tax receipts according to Richard Koo, chief economist at Nomura Securities. In this kind of environment, Dr. Koo argues that a "proactive fiscal policy is far more desirable" in sustaining the economy and thus raising tax revenue. If the economy stutters, then tax receipts collapse only aggravating the deficit further. This is sound advice on both sides of the Pacific.

Japanese officials are considering drafting a fresh fiscal stimulus package to stem the downturn before the economy collapses. Prime Minister Taro Aso has promised spending worth almost 50 trillion yen ($545 billion) in two packages.

Honesty and Blame
While the President will sign the American Recovery and Reinvestment Act this week in Denver, it bears reminding that this is just one bill and that the nation's economy has been a train wreck in the making since the 1980s. We did not arrive at this position overnight nor should we be optimistic that fix is just around the corner, not unless that corner is 2014. It is imperative that the President temper expectations and demonstrate leadership by being brutally honest with the American people. The American economy is a mess. There's plenty of blame to go around but the President must make it clear that this is the legacy of Ronald Reagan. This is largely on the GOP.

Attributes of a Balance Sheet Recession
We are likely in what it is termed a balance sheet recession. No two economic crises are wholly alike but it is clear that the cause of our economic woes is the bursting of an asset bubble across multiple sectors and globally at that. Even though a balance sheet recession typically is marked by huge non-performing loans (NPL) problems within the banking sector, the causality is from the soft economy and the depreciating asset prices to NPL problems, not the inverse. In short, the cause is the conditions that permitted the creation of the asset bubble. While the forces behind globalization are diverse and complex, it seems clear that the greatest flaw in the system was the lax regulation of the financial markets especially around the process of securitization, derivative-trading and the free flow of capital. Congress must act and move to regulate the financial sector. Better oversight of the complex instruments used in global finance might have prevented the severity of our current crisis.

Balance sheet recessions also are immune to monetary fixes. Interest rates are at or near zero. The fix is purely fiscal and it must be sustained. The President must begin to tailor his budget with more short and long term government investment in the economy. It is also imperative that whole asset classes be cleaned out. The balance sheet of the nation's banks will continue to deteriorate as more companies default on their debt. The sooner we tackle the bank capitalization problem, the better. It's cheaper and our recovery will come sooner.

We cannot repeat Japan's mistakes.

Tags: Japanese Economy, Fiscal Stimulus, American Recovery and Reinvestment Act, Balance Sheet Recession (all tags)

Permalink :: 16 Comments :: Post a Comment

Answer to headline: Almost definitely. (none / 0)

The Japanese, along with the Chinese, are (were?) the two biggest buyers of U.S. debt. With the Chinese already focused inwards, in terms of expenditure commitments, to keep their economy expanding (because they have little choice but to do that), that leaves the Japanese, who will now have to completely focus upon their internal economic hardship(s), too.

This adds fuel to the fires of concern that if deflation doesn't get us, hyperinflation will.

It's going to get much uglier, everywhere (but, perhaps, in the U.S. moreso than in many other places), before it gets better.

by bobswern on Mon Feb 16, 2009 at 05:27:33 AM EST

Re: Answer to headline: Almost definitely. (none / 0)

deflation or inflation-- that seems the big bet.

by Jerome Armstrong on Mon Feb 16, 2009 at 11:59:18 AM EST
[ Parent ]

Interesting take on Japan (none / 0)

This is quite possibly the most interesting take on Japanese fiscal policy. Of course I laughed when Obama had similar sentiments. Our direction is do what Japan has done(just more of it) and to remember not ever to stop spending.

The best advice is to temper any promises now and shift to controlling expectations! You know this cycle gets a little old. Promise the world up to elections, then temper all of your promises once you get elected. That is worrying less about the financial state of the country and more about maintaining power for the party.

If people knew this emergency legislation was going to take 5 years to start working, they might have joined the do nothing bus. What a joke.

The more I think about it, the more this Recovery act is going to stretch out the recession. It almost seems like the is what it is designed to do.

"There have existed, in every age and every country, two distinct orders of men - the lovers of freedom and the devoted advocates of power"

by Classical Liberal on Mon Feb 16, 2009 at 08:34:42 AM EST

Wrong lesson (none / 0)

That's not the lesson from Japan at all. Japan ignored the problems for too long and the deflationary spiral set in.

by elrod on Mon Feb 16, 2009 at 08:55:23 AM EST
[ Parent ]

There always seems to be an excuse (none / 0)

It must be nice to so easily be able to talk around the problems with the stimulus plan. Japan didn't spend fast enough, Japan didn't spend enough, Japan didn't spend on the right things. Can we at least admit that we are following the same strategy of defiect spending to get out of the recession that Japan did.

Look at the 90's. As Japan increased its spending to try to save it self from a recession, the US actualy cut federal spending as a percentage of GDP and we all know how the 90's ended up - Those glory days of Bill Clinton.

The more I think about it the people touting this stimulus package have no faith in the future. Not for logical reasons, but for idological reasons.

"There have existed, in every age and every country, two distinct orders of men - the lovers of freedom and the devoted advocates of power"

by Classical Liberal on Mon Feb 16, 2009 at 09:26:03 AM EST
[ Parent ]

Re: There always seems to be an excuse (none / 0)

Japan never reformed their business institutions and they have a gray-haired population. Now, their export market has collapsed with the Koreans and Chinese eating up their electronics export market and the Koreans (and soon Chinese) nipping at the devastated American car market.

Crony Capitalism, an aged workforce with xenophobic opposition to immigration, and collapsed markets, it's a picture of our future under the neocons.

by antiHyde on Mon Feb 16, 2009 at 10:17:10 AM EST
[ Parent ]

Re: Interesting take on Japan (none / 0)

how would it help Obama or any of the Democrats to make the recession last longer?

by the mollusk on Mon Feb 16, 2009 at 11:20:10 AM EST
[ Parent ]

Re: Interesting take on Japan (none / 0)

"The more I think about it, the more this Recovery act is going to stretch out the recession. It almost seems like the is what it is designed to do."

Interesting take, though I think its more by default than design-- sorta the same mentality that said change and the new and then did the opposite with the same old crew.

Its basically the Democrats turn now, but it still seems that monetized interests have too much invested in the system to be ignored. We are still a long ways away from being people-powered.

2010-- it remains to be seen whether we see Democrats that voted in the previous election do not show up as compared with the Republican base. Certainly, the early results here in Virginia's special elections (I'm thinking of the bare win in the Fairfax County Chair race) that bears this out currently, but you could look at the Georgia Senate run-off too. But long ways to go still.

Hopefully, we'll the Obama administration approach about 11 other huge problems with about the same determination as they have with bailouts and stimulus. That'll give us about a 70% chance, says Joe Biden.

by Jerome Armstrong on Mon Feb 16, 2009 at 11:58:23 AM EST
[ Parent ]

Re: Interesting take on Japan (none / 0)

It is hard to accept that the individual pieces of the stimulus bill where actually created to "stimulate" the economy. The general consense seems to have shifted to we need to spend our way out of this and any talk of fiscal responsibility would kill the economy.

If the new spending where to be taken away at any time we will see a down turn in the economy. I am just asking when will the other shoe drop? When will we be asked to finance these programs. We can not govern free of fiscal sanity forever, the interest payments alone catch up with us quickly. Add in unfulfilled SS promises and we are in a heap of debt.

Of course in crisis mode you can get bills past skipping the "how are we going to pay for it" step. By keeping the country in a constant state of panic, ginned up not only over the last few months but really since 2000, the leaders in the House and Senate can pass any legislation they want and if it fails there is always the get our a jail free card of they "inhereted these problems".

"There have existed, in every age and every country, two distinct orders of men - the lovers of freedom and the devoted advocates of power"

by Classical Liberal on Mon Feb 16, 2009 at 02:43:18 PM EST
[ Parent ]

Re: Interesting take on Japan (none / 0)

Sorry to step on this thread, but while I agree with the crux of what you are saying:

We can not govern free of fiscal sanity forever

I couldn't agree more. The difference I see, however, is that we have been living this way for the better part of three decades and the investment in public infrastructure (in the broadest sense including education and energy alternatives), during this period has dwindled. So while we've been on a spending binge, the things we've spent money on haven't necessarily contributed to a better future. Iraq. Missile defense. Troops stationed in >100 countries. Tax cuts. Flattening the income tax structure. This is how we spend our money.

The stimulus package represents the first halting steps toward rethinking the tinkle-down economic theories in almost thirty years. Some of it may be wasted. But compare that to any of the things I listed above and it doesn't look that bad.

by the mollusk on Mon Feb 16, 2009 at 05:12:25 PM EST
[ Parent ]

Re: Interesting take on Japan (none / 0)

I disagree with your premise that infrastucture is weak, but even if I were to accept that it still doesn't change the point that this "infrastructure" spending will not stimulate the economy, it wasn't designed to and it won't. It was a mistake to sell it that way for a mere politican convenience. Maybe that is what you were saying.

I think your idea that non-defense spending as decreased over the years in simply not true. View this chart

The fact that you bring up tax cuts also doesn't really matter(other than to our debt) because the US government spent what it didn't have and almost every US president doubled our debt over the last 30 years.

Bush: 6-12 trillion
Clinton: 3-6 trillion
Bush: 2.4 trillion - 3 trillion
Reagan: 1 trillion - 2.4 trillion

The state of the country and trikle-down economics just don't connect for me other than to say our government spent more than it took in on a consistant0 basis. I do agree that tax cuts without spending cuts artificially holds up the economy by adding more money into the economy.

I guess we could go back in forth all day on government spending. I agree there is a proper level and infrastructure is needed along with regulations, I just have yet to really see much movement downwards in any programs. Only one party or the other using the purse of the federal government to push their ideals. Right or left, I just don't think it is the right thing to do.

The discussion we all should be having is not "how do we stimulate the economy", but "What kind of government do we all want to live under?"

Thanks for "stepping" on the thread. :)

"There have existed, in every age and every country, two distinct orders of men - the lovers of freedom and the devoted advocates of power"

by Classical Liberal on Mon Feb 16, 2009 at 06:41:32 PM EST
[ Parent ]

Re: Interesting take on Japan (none / 0)

Either the pentagon or social spending is going to have to give. This is the crux of the problem with Obama's bipartisanship-- it means spending on both into deficit.

The only way that can last is with some sort of big inflationary period.

by Jerome Armstrong on Tue Feb 17, 2009 at 09:11:47 AM EST
[ Parent ]

You may be right (none / 0)

Twice this week I heard economist hoping to "inflate our way out of this". That really hurts everyone though, but I guess one way or another we will feel the pain.

"There have existed, in every age and every country, two distinct orders of men - the lovers of freedom and the devoted advocates of power"

by Classical Liberal on Tue Feb 17, 2009 at 11:20:38 AM EST
[ Parent ]

Isn't that a "Depression"? (none / 0)

I thought one of the components to an economic definition of "depression" was a fall of annualized GDP by more than 10%. Is that true?

by elrod on Mon Feb 16, 2009 at 08:54:07 AM EST

Re: Does Japan's Fall Presage Our Own? (none / 0)

Japan is export dependent, the US is dependent on financial services.

Both countries are screwed.

by Organic George on Mon Feb 16, 2009 at 09:17:07 AM EST

Re: Does Japan's Fall Presage Our Own? (none / 0)

"While the President will sign the American Recovery and Reinvestment Act this week in Denver, it bears reminding that this is just one bill and that the nation's economy has been a train wreck in the making since the 1980s."

Totally agree. Which is why I wonder why they would call it such, as if this Act were even close to being enough to turn it around. Its a bit, if not a lot, oversold.

by Jerome Armstrong on Mon Feb 16, 2009 at 11:47:46 AM EST

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