US..think your economy is sick? Look at Japan to see how bad it could be

By: ispeculatornew
Date posted: 02.16.2009 (4:00 am) | Write a Comment  (7 Comments)

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Since the start of the crisis over a year ago, much has been said about the similarities and differences between the current slowdown and the “lost decade” of Japan, a slowdown that affected the world #2 economy for well over a decade and which it has yet to recover from. There are many differences of course, but a lot had been blamed upon the reluctance by Japanese authorities to let “sick” financial institutions go down. And at least in that regard, there are many similarities with US authorities trying to save several US institutions (although even letting others fail has been regarded as a mistake by many thus confirming that there is no way to come out on top in such a context).

And today is a grim day even by Japanese standards. They were set to release their GDP for the last quarter and estimates were very negative with a consensus of a -11,6% decline. But it came out a lot worse actually, with a 12,7% decline, the worst since 1974. Exports of cars and high end goods such as tv’s. And of course the rising yen is not helping at all. So exports came in with a decline of 13,9%. “There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”

Is the same to be expected of the US economy? Thankfully, not for now at least as the US economy is less dependant on exports and its major stimulus should be able to get things more stable. Of course, a deterioration of either the real estate markets or confidence in the financial markets could put more downward pressure leaving the Fed and Treasury will little left to do.

And perhaps the worst scenario would be the one where the world starts to lose belief in the US dollar and in the ability of the US government to pay back its debt. There have already been hints that countries like the US could lose their AAA credit rating and that could be setting a very dangerous background for the world in general.

Am I being dramatic? Perhaps. But let’s not forget that Japan is one of the major economies in the world and the US is not beyond such tragic problems. It is important to act as quickly as possible because once you reach a point like Japan has, there is little left to do except wait for things to get better, and as Japan has discovered, once that happens, you are in for a long wait.

The positive aspect about all of this is that everyone seems to agree on the urgency of the situation and the need to act now, which might be what saves the US economy in the end…

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  1. Comment by Simpless — February 16, 2009 @ 4:10 pm

    Hi IS,

    Good analysis. I don’t think that the same is to be expected of the US economy either.

    Even a few months ago, some predicted that Japan’s economy would be the best performing among the world’s most advanced nations… The Japanese government and Japanese companies will have to adjust very, very quickly, if they do not want to live a second time the so-called lost decade!!!

  2. Comment by admin — February 16, 2009 @ 9:32 pm

    Hello Simpless!!

    Yes, Japan has very tough times ahead..not sure how they will react. Truth is that few have ideas about how to get back to a healthy economy…

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  5. Comment by Manshu — February 23, 2009 @ 10:31 am

    You hit the nail on the head – AAA status and dollar as the currency reserve is what will help US tide over the current crisis.

    Although it may not sound insane the fact that US is doing slightly less worse than ther rest of the world is actually good for the rest of the world.

  6. Comment by IS — February 23, 2009 @ 12:45 pm

    No doubt it will help, but I think it would be a big mistake to underestimate how serious the situation really is.

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