Everyone’s all Japan, Japan, Japan these days, so it’s refreshing that GMO’s Edward Chancellor is standing athwart the crowd arguing that, no, the US is turning Japanese.In an op-ed at the FT, Chancellor cites a recent BIS paper, which points out that credit busts and Japan-like deflationary recessions do not necessarily go hand in hand. In fact, throughout history there’s only been one: Japan.
There are many instances where countries experiences severe credit contractions, but then grew.
Chancellor notes that unlike Japan, the US has a) recapitalized its banking sector and b) benefited from an aggressive central bank.
He also touches on a theme that was addressed quite thoroughly in a recent Morgan Stanley paper — namely that Japan chose to be deflationary, because for demographic reasons it made more sense.
Chancellor definitely does not see us making the same decision:
Nor is there much political capital to be gained by allowing the US to sink into deflation. The country’s demographic profile is younger than Japan’s. Whereas the Japanese credit boom was largely a corporate affair, American households have vast outstanding debts. Since US mortgages are fixed rate, homeowners would benefit from a pick up of inflation.
Meanwhile, it should be noted that GMO’s James Montier has also been on this subject lately, arguing that bonds are not necessarily in a bubble, but definitely not poised to offer good returns, unless we’re Japan (which he doesn’t see as being likely).