Many experts' predictions about the U.S. economy are gloomier than usual, some comparing the post-boom struggles of the economy and stock market to Japan's in the 1990s, when that nation suffered repeated recessions and a horrifying drop in prices for homes and other assets.
Although the pessimism is overblown, the uncomfortable comparison should not be dismissed. Japan's stock market began a decline in 1989 that has erased almost 75% of its value. But the full horrors of falling prices and economic stagnation emerged gradually over several years and is felt today.
In the U.S., stock markets have steadily declined since 2000, prices for most commodities have fallen for the last year and the economy seems unable to mount a strong recovery. Also, home prices have risen so rapidly that many experts warn of a housing "bubble."
Federal Reserve Board Chairman Alan Greenspan will be urged this week to lower the federal funds rate from its current 40-year low of 1.75%. Some might recall that Japan's central bank lowered interest rates in the '90s to near zero, but couldn't revive that once-mighty economy.
Yet the parallels, however interesting, are inexact and do not give the full picture. The U.S. economy is far less vulnerable, more flexible and inherently stronger than Japan's. And U.S. housing markets are not in a bubble, although feverish home sales and the rapid escalation in prices are due to slow down in many parts of the country.
In fact, a good way to understand the strengths, weaknesses and true prospects for the U.S. economy is to examine in what ways it operates differently from Japan and most other countries.
At its best, the economy faces up to difficulties. This year--and probably next--the economy is working off the excesses of the late 1990s boom in telecommunications and high tech. And it is doing so with the same dispatch that the savings-and-loan crisis was dealt with a dozen years ago--through bankruptcies, write-offs and sales of assets. That's disruptive and painful for workers who lose jobs and for investors who lose money, but the economy moves on.
Japan, by contrast, was unwilling for years to endure the hardships of bankruptcies and still has not been able to fully work off the excesses of its late 1980s real estate and investment boom.
Undeniably, there are risks in the U.S. economy right now.
"A major concern is that business can't raise capital," says Mark Kiesel, portfolio manager for high-grade corporate debt at Pacific Investment Management Co., or Pimco, a Newport Beach-based investment firm. Suspicious of companies' inability to increase sales and earnings, and of corporate accounting, banks have cut back on lending. Bond and commercial paper markets are discouraging to most firms, and stock markets are not receptive to new financings. Of course, in a slow economy, just about the only firms wanting to borrow are the weak and desperate.
Yet that spells opportunity for venturesome investors with capital. Warren Buffett, through his holding company Berkshire Hathaway Inc., since March has invested $2.5 billion in buying two natural gas pipelines and backing a fiber-optics telecom firm.
Analysts credit Buffett with shrewdly buying long-term value at low prices.
"There should be more private equity investments like that. They get the economy moving," Kiesel says.
Investors have to take a long-term view because a threat of falling prices or deflation is hanging over the economy. The index of wholesale, or producer, prices released Thursday showed that, food and energy aside, prices for all goods produced by industry have fallen each month since October. That is not good news. Deflation discourages firms from investing in new products, hurts their ability to make a profit and, by extension, hurts their stock prices.
If deflation were to hold in the U.S. as it did in Japan in the '90s, the U.S. economy would be in severe trouble. But that is where U.S. policy contrasts most significantly with Japan's, says economist John Vail, investment strategist for Mizuho Securities-- the investment arm of giant Mizuho Financial Group, which resulted from the combination of three major institutions: Fuji Bank, Dai-Ichi Kangyo Bank and the Industrial Bank of Japan.
"Greenspan has kept interest rates low to support housing, where in Japan in the early 1990s, Bank of Japan Governor [Yasushi] Mieno raised interest rates to pierce their real estate bubble," Vail says.
The effects of curbing real estate speculation, and many other factors, hobble Japan's economy to this day.
Meanwhile, low mortgage interest rates have made housing the strongest sector of the U.S. economy and have launched a wave of mortgage refinancings that have put money in consumers' pockets and supported sales of home furnishings, appliances and other consumer goods.
The worry is that housing markets are too strong, with home prices nationally rising more than 10% in June.