Some economists have been listening to the 80s song by The Vapors in their warnings about a decade of Japanese-style deflation. While we do share similar predicaments, there are vast differences between our two economies, based partly on our different cultures. Deflation may be the Japanese story of the last lost decade, but it probably won’t be ours.
First, though, what do we have in common? We both have massive government spending programs put in place to stimulate the economy and revive battered banking systems. While our stimulus is relatively new, Japan’s is over a decade old. Japanese government debt now exceeds 180% of GDP, according to a recent article in The Economist. That’s the highest of any developed nation. The U.S. is “only” at 56% but rising fast. Yet despite all that spending, Japan hasn’t seen inflation in over 20 years. What gives? Inflation comes from overspending, and overspending can only come from 3 places: government, private sector (consumer spending and business investment), and foreigners (who buy exports). Japan is a big export machine, enjoying global demand for consistently high quality products. Government has also done its part. However, both together were not enough to outweigh the drag created by Japanese consumers’ underspending.
Why do Japanese, on average, underspend? First, they tend to have a higher work ethic. Working longer hours, they simply have less time for shoppiong. Second, after centuries of fires and earthquakes, Japanese families have a long history of saving to rebuild their house every 15 years. So, they don’t spend on lavish home improvements like those that drove our last boom cycle in the U.S. Third, their population is shrinking and aging. Finally, Japanese culture doesn’t encourage borrowing. For the average Japanese consumer, repayment is a lot more enjoyable than borrowing.
The end result of pumping a lot of dough into an economy with little spending and little borrowing is…nothing. The money (in Japan’s case, the government’s stimulus money and our export money) just sits as reserves in the banking system, as cash on business balance sheets, or as savings for consumers. It’s not in circulation helping the economy to grow. One possible answer for their problem lies in the overregulated small business and service sectors, where more economic freedoms could spark both business and consumer spending.
The Japanese are famous savers, and this has kept their economy from recovering for over 10 years. Now Americans have entered an era of “New Frugality” – could we end up in the same boat? I don’t see it. In contrast to the average Japanese, average Americans are practically born and raised at the mall. Spending Saturdays “just browsing” is a national pastime. While fewer of us may be doing so now, the cultural urge to splurge is as ingrained as Japan’s urge to save. Further, the “American dream” of owning a home isn’t a trend that will disappear in a decade. Americans love owning their homes, love spending on them, and will continue to borrow profligately to buy and improve as much house as the bank tells us we can afford. Repayment? I’m not sure many Americans know what that is. No, I don’t see American consumers standing in the way of an eventual recovery like the Japanese have.
Does that mean inflation is on the horizon? Not as long as we have a hobbled banking system and a trade deficit. For at least 20 years, the Japanese have made products the world adores and demands. They have collected foreigners’ (our) money and given up little of their own. That’s called a trade surplus. The last time the U.S. ran a trade surplus was 199? One possible way out of our troubles is to start making more goods and services the world adores and demands than buying others’ goods and services that we adore and demand. Not an easy task in a consumption-and-borrowing based culture.