Worry Over the ‘Japanification’ of the U.S. Economy Is Overblown, Economists Say - Barron's

Worry Over the ‘Japanification’ of the U.S. Economy Is Overblown, Economists Say - Barron's

The Bank of Japan’s policy rate has hovered around zero for more than 20 years. Photograph by Maddie Meyer/Getty Images

Economists have been warning for years that the U.S. economy could start to look like Japan’s, using the term “Japanification” to describe that change. But Bernstein Research is questioning the comparison.

From a distance, there are obvious similarities between the U.S. and Japan. Both countries implemented ultra-loose monetary policies after debt-fueled financial crises. And, despite their central banks’ best efforts, both have experienced relatively sluggish and inconsistent economic growth.

Because the Japanese financial crisis happened in the 1980s, some Wall Street strategists think America’s future could look a lot like Japan’s recent past. But in a note on Monday, Bernstein economists cautioned against trying to draw neat parallels between the two countries.

One key difference is inflation, according to economists Philipp Carlsson-Szlezak and Paul Swartz. U.S. consumer prices haven’t been stagnant, unlike in Japan, where prices experienced a few years of deflation in the decade after the financial crisis. U.S. policy makers see inflation as 0.25 to 0.5 percentage points too low, whereas Japanese leaders think inflation is 2 percentage points too low, the economists wrote.

That is why the U.S. has been able to keep its interest rates above zero for years, in their view, while Japan hasn’t.

“Largely speaking, full-blown Japanification is not the right lens for the U.S. outlook—even if the U.S. has a mild case of the disease,” Carlsson-Szlezak and Swartz wrote.

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The inflation divergence hints at a few differences between the two economies. First, investment in the U.S. has been steadier than in Japan, where investment collapsed after its financial crisis. Second, the U.S. population has been growing, albeit at a slowing pace, while Japan’s hasn’t. Third, productivity growth—the economic output per unit of labor (or other input)—has been higher in the U.S. than in Japan, although it has slowed in both countries.

The economists, however, don’t think the U.S. central bank will be much more effective in the future than Japan’s has been. The Bank of Japan’s policy rate has hovered around zero for more than 20 years. The Federal Reserve cut its policy rates close to zero in 2008 and kept them there for seven years. The Fed has since raised rates, but was able to keep them above 2% for only 16 months. (While Europe has kept interest rates low, as well, that region is grappling with its own set of challenges.)

“If Japanification is the unhappy co-existence of heavy stimulus and mediocre growth outcomes, then our coverage of the U.S. economy has frequently pointed out just that pattern,” they wrote. “The fact is that [monetary] policy effectiveness is diminished in the U.S.”

So investors may still want to consider the implications for U.S. stocks, they said. Japan has been hit by more recessions than the U.S. has, and the Bernstein economists attribute that partly to the ineffectiveness of Bank of Japan policy. And in the 35 years since Japan’s financial crisis, the Japanese stock market has experienced more large declines than have U.S. stocks.

“While not the full explanation, we find it easy to believe that part of the reason for this is that a regime with less policy leeway and more recessions is worse for equity investors,” they wrote.

That might not bode well for the next 25 years of U.S. stock market returns—yet the Dow Jones Industrial Average and S&P 500 are both still close to their latest record highs.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

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2020-01-14 12:00:00Z
https://www.barrons.com/articles/japan-u-s-economy-inflation-consumer-prices-central-bank-policy-rates-japanification-51578951489
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