With 10-year Treasuries sub 2%, and growth restagnating, more and more people are buying into the “US is Japan” scenario.
And it’s not just that the numbers look similar economically.
The same thing has ailed both countries: a multi-year project to pay down private sector debt.
In his latest note, Nomura’s top economist Richard Koo suggests that the US-Japan comparison might be too rosy!
US balance sheet recession may be deeper than Japan’s
In one respect the US balance sheet recession is far more severe than Japan’s. Even though real interest rates—nominal rates adjusted for inflation—are far lower in the US than they were in Japan at end-1997, they have yet to elicit any reaction from the US economy.
Not only has the US economy’s response been similarly anemic, but the unemployment rate is also more than twice as high. Moreover, it took seven years from the collapse of the Japanese bubble for long-term rates to fall to that level, whereas only three years were needed in the US. Real GDP also stood substantially above bubble-peak levels in 1997 Japan, while in the US it has already slipped below the high-water mark.
End of US housing “myth” may have far-reaching consequences
The more pronounced weakness in the US economy in spite of lower real interest rates suggests the housing bubble collapse had at least as serious an impact as it did in Japan. The belief that it was impossible to lose money buying Japanese property persisted for 45 years after World War II. The
corresponding US housing myth lasted even longer—some 70 years—and the psychological damage resulting from its collapse may be that much larger.
Both of those points are incredibly powerful.
The first is funny, because the rapid increase in unemployment (and rapid collapse in yields) has been taken by some as a good sign: That the restructuring and liquidation of society has happening at a faster pace and that’s good. But then this could easily be interpreted badly. Things are worse, and the market has therefore hit worse levels faster.
And his second point speaks for itself. Thinking about destroying a 70-year myth puts talking about month-to-month Case-Shiller numbers in some perspective.
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