02.28.09
Some Lessons From Japan’s Lost Decade
We’re in a position in the world economy that few in America would have imagined one year ago. And yet there are lots of examples from countries around the world that went through similar crises — we just never thought it would happen to us.
I’m shifting the focus of the my postings over the next few months from Asia to Latin America. I’ll be teaching a course on “Doing Business in Latin America” at Golden Gate University and I’ll work in examples from that. There are many examples of dealing with debt crises and cleaning up bad bank loans from the crises in the 1980’s that swept through the continent.
But before we switch gears, I’d like to take one final lesson from Japan. I talked previously about how Japan had gotten itself out of the “Lost Decade” of the 1990’s by taking the tough medicine of forcing the banks to clean up their loans and by making internal reforms in government organization and regulation. There are lingering costs however in terms of consumer spending. The New York Times wrote a great article last week about how Japan’s consumers have cut back spending as a response to stagnant real incomes. The Japanese were famous for saving up to the 1980’s but even that rate has fallen as the country rapidly ages.
The US has finished not so much a business cycle as a credit cycle. Private sector debt has risen steadily as a percent of GDP since 1952, accelerating rapidly during the Reagan years and since 1997, reaching over 350% of GDP. The market is correcting and credit will be tighter. This means less consumer spending, fewer leveraged buyouts, less M&A activity, lower inventory levels, etc. Companies will have to rely on organic growth as opposed to infusions of equity (especially from hedge funds) or debt. We face a difficult era ahead for the middle-class worker.
What is the way out? The US has traditionally grown around 2 1/2 to 3 1/2 percent in real terms. About half of this has been due to population growth while the other half has been due to increases in productivity. The emphasis is going to have to be on productivity and the key there is education, education and education.
Send me your thoughts.
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