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The New Economy

Will the US become another Japan?

The differences between the US and Japan are great, but expect a Japan-like lengthy period of slow growth and deflation as America works down its debts

By A. Gary ShillingContributor / October 4, 2011

In this file photo, a foreign exchange dealer is seen through the national flags of the U.S and Japan as he takes a break at a trading room in Tokyo. Is the US headed for something similar to Japan's long-running deflationary depression?

Kim Kyung-Hoon/Reuters/File

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With interest rates close to zero, feeble economic growth, big government deficits, and threats of deflation, many wonder if the United States is headed for something similar to Japan's 20-years-and-running deflationary depression.

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America's recent anemic growth looks absolutely Japanese: a 0.4 percent rise in real gross domestic product in the first quarter and a 1 percent rise in GDP in the second. The downgrade of US Treasury bonds by Standard & Poor's parallels the cut in Japanese bond ratings in 1998. Furthermore, the prospects of substantial fiscal restraint in the US to curb the federal deficit is reminiscent of earlier tightening actions in Japan when modest economic growth turned to recession in 1997 after deficit- and debt-wary policymakers cut government spending and raised the national sales tax.

Big government deficits in recent years – the result of attempts to stimulate weak economies – are another similarity. The US government debt-to-GDP ratio is headed for Japan's level.

Japan, in reaction to chronic economic weakness, spent lots of money in recent years, much of it politically motivated but economically questionable. Is that distinctly different from the $814 billion US stimulus package in 2009 that was supposed to finance infrastructure projects? A key reason for the 2009 and 2010 US fiscal stimuli and the continuing deficit spending in Japan is because aggressive conventional monetary easing did not revive either economy. Zero interest rates don't help when banks don't want to lend and creditworthy borrowers don't want to borrow.

Despite these similarities, though, there are considerable differences between the two nations.

The Japanese overall still enjoy high living standards. There has been nothing like the two-tier US economic recovery that benefited top-tier stockholders in 2009 and 2010, but left the rest struggling with high unemployment and collapsing home prices.

Postwar Japan has been an export-led economy. Robust exports and weak imports linked to anemic domestic spending create perennial current account surpluses. Those, along with earlier high saving by households and now by businesses, allow Japan to finance its huge government deficits internally. As a result, its government bond yields are extremely low.

In contrast, the US is an importer with a chronic current account deficit. So foreigners have perennially bought Treasurys with the resulting dollars they earn, and they now own about half of them (versus 5 percent of Japan's debt). Treasury note and bond yields are higher than in Japan. The US is largely an open economy; Japan, except for its export sector, is largely closed.

Another big difference is the chronic strength in the yen and longtime weakness in the dollar, resulting in part from the difference between Japan's chronic current account surplus and America's chronic deficit. The yen's strength has led to Japanese manufacturers moving much of their production to lower-cost areas.

As a result, I think the differences between the US and Japan are too great to use the Japanese economic experience in the last two decades as a template for the US in coming years, although I expect a Japan-like lengthy period of slow growth and deflation as America works down its debts. And I doubt US policymakers can forestall the trend – any more than Japan has been able to generate robust economic growth.

A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."