Lots of people continue to make over-strict comparisons between Japan’s debt-engorged situation and that of the U.S. There is a new Credit Suisse report out arguing that such comparisons are way overdone. Here are the main bullets:
- The US has had far more proactive fiscal/monetary policy (Japanese monetary conditions were tight until 1995 unlike the US today, Japan fiscal easing was small);
- Japan had falling wages since 1997 and negative inflation expectations since 1993 (US wage growth and inflation expectations are >2%). Falling wages create sustained deflation;
- Asset deflation was more acute in Japan, with house prices declining by almost 80% in the big cities;
- The US moved to recapitalise banks quickly and have already written down 85% of their estimated losses (Japan needed 13 years to do that);
- Japan was very slow to de-regulate (and hence the price of labour fell as oppose to the quantity) with companies having little incentive to maximise RoE, the return on capital is a third of the US;
- Deflation became economically and politically acceptable because Japanese households have net financial assets of 41% of GDP so they benefit from deflation.
I don’t disagree, but keep in mind that it’s early. Japan has had more time to sink deeply into its mess than the U.S. has.