Can Japanese Rates Happen Here?

Loss of Free Will

Why these parallels should exist at all may be the scariest thing you see this Halloween. Let's recount some differences between the U.S. and Japan.

• The Japanese bubble of the 1980s was a mutually reinforcing affair between their stock and real estate markets, while our stock and real estate markets have had a shifted phase.
• Japan has struggled through several periods of outright recession since 1990. Japan's export sectors faced increased competition from Taiwan, South Korea and especially China while several of its Asian customers faced devastating losses of purchasing power in 1997-98. As noted above, our economy has grown since the bubble burst; the 2001 recession was one of the mildest and shortest on record.
• As noted in the six-month chart, the Bank of Japan continued to raise short-term rates after its stock market bubble burst; the Federal Reserve did the opposite.
• Japan's business culture precluded the forced consolidation of banks whose balance sheets indicated functional insolvency, while we have both allowed and induced some spectacular business failures.
• Japan's national debt is approaching 139% of GDP, while the U.S. level is "only" 63.2%.
• Japan raised its national sales tax in 1997. The U.S. has reduced taxes throughout the Bush administration.
• Finally, Japan has a culture of saving obsessively and let's just say the U.S. does not.

The persistent trend lower in yields despite economic growth and government deficits suggests there are forces, maybe just postbubble forces, at work that are beyond our control. Consulting the Oracle will not help; we need to start thinking about the unthinkable, and that is a continued trend of lower yields when all prior training suggests the opposite should be occurring.