Sent: 30-08-2011 10:28:03
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US Recovery: More on Lessons from Japan
Investors face critical judgments about how quickly more normal economic conditions will resume in the USA. Japan's experience should not be ignored.
I wrote this introductory paragraph for Edition 54 of the monthly ATC Digest in October 2008 in an article which questioned whether the US economy was sufficiently different from the Japanese economy to be able to avert a similar fate to that suffered by Japan after its own asset price bubble burst 20 years ago.
In looking back at that article, I decided to take the easy way out this week and to simply quote some of its key paragraphs.
- Despite the dramatic and possibly catastrophic shutdown in US bank lending, there is a sense among policymakers and commentators that the worst of the potential impacts can be averted, monetary conditions stabilised and more normal growth re-established quickly thereafter.
- Such a view is not uncommon and, to a large extent, understandable, especially among investors who have seen all the major economic threats of recent years shrugged off as asset values have continued their ascent.
- An observer of the Japanese economy could have a different perspective. An asset price bubble burst in Japan nearly 20 years ago and economic life there has never been the same again.
- The Japanese post-bubble experience runs counter to the judgment that policymakers can extricate the US economy from its current bind and put it back securely on a path consistent with its historical growth trajectory some time in the first half of 2009.
- Investment advisers need to make an important judgment about whether the US economy is running parallel to the Japanese track or whether there are critical differences which make for a less arduous and more conventional cyclical economic recovery.
- The ability of the US authorities to extricate their economy from its current bind probably hinges on the status of the US as the home of the global capital market.
- The liquidity infusion being attempted needs to accomplish two objectives: it must be strong enough to compensate for the liquidity drain elsewhere; and it must also be strong enough to engender optimism about the future.
There is now one further piece of accumulating information that reinforces the similarities between the current US predicament and what happened to Japan. The blue line in the chart at http://www.thebigpicture.com.au/atc/jap_us.pdf shows the Nikkei 225 stock price index, adjusted for movements in the US dollar exchange rate, since 1984. The red line is the S&P500 stock price index since 2007. It has been repositioned so that the high point in the US market coincides with the peak in the Japanese markets.
On Friday, Ben Bernanke addressed his central banking colleagues at their annual Jackson Hole retreat painting an upbeat picture of the US economy. According to the Fed chief, the economic events of the past four year will not adversely affect the economic outcomes in the longer term.
Bernanke might be right. On the other hand, he might have simply been trying to do all he could to support an ailing economy having run out of policy instruments to prevent a repeat of the Japanese malaise.
Even casual observation suggests that the emerging US market pattern is becoming scarily similar to that which followed the Japanese asset price decline.
The evidence is not conclusive. There are still some critical differences between Japan and the USA that position the USA more favourably. Nonetheless, the Japanese trajectory is clear: a 20 year decline in market values punctuated by periodic but ultimately unsustainable rallies that confounded investor expectations of a return to more normal market returns.
Financial advisers are still confronted by the same judgement referred to in the 2008 ATC Digest article.
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