Deutsche Bank AG’s Ajay Kapur says the U.S. is sliding into an economic malaise similar to Japan’s so-called lost-decade of the 1990s. The Hong Kong-based strategist draws the parallel using similarities in demographics and financial-market performance.
Binky Chadha, head of the bank’s U.S. equity strategy team in New York, and Michael Biggs, one of its London-based economists, disagree, citing variations in the nations’ growth rates and credit demands.
The researchers aired their differences in a 28-page report Deutsche Bank released October 17 and distributed to clients. The debate underscores the uncertainties facing the world’s largest economy. Fifty-six percent of respondents in a quarterly Bloomberg Global Poll of 1,031 investors, analysts and traders said a Japan-like scenario is “very” or “fairly” likely.
The first decade of this century started with the so-called dot-com bubble. When it burst, central banks moved aggressively to ease monetary policy in order to prevent a prolonged period of Japanese-style slow growth. But the prolonged period of low interest rates that followed the 2001 recession instead contributed to the emergence of another bubble, this time in real estate and credit.
With the collapse of the second bubble in a decade, central banks again acted quickly, lowering rates to zero (or close to it) almost everywhere. Recently, the United States Federal Reserve has even engaged in an unprecedented round of “quantitative easing” in an effort to accelerate the recovery. Again, the key argument was the need to avoid a repeat of Japan’s “lost decade.”
Policy making is often dominated by simple “lessons learned” from economic history. But the lesson learned from Japan is largely a myth. The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6 percent compared to 1.7 percent for the U.S. The difference is actually much smaller than often assumed, but at first sight a growth rate of 0.6 percent qualifies as a lost decade.
According to that standard, one could argue that a good part of Europe also “lost” the last decade, since Germany achieved about the same growth rates as Japan (0.6 percent) and Italy did even worse (0.2 percent); only France and Spain performed somewhat better.