For the motion

Ajay Kapur
Market/economic indicators in the US following Japan with an 11-year lag We suggest that the longer-term demographics, property bubbles/busts, trajectory of stock and bond markets, relative performance of financial stocks, stock-bond ratio, leading indicators of inflation, credit multiplier, path of real GDP growth, evolution of corporate balance sheets and government finances in the US are simply following those of Japan, with a lag. The risk to our view is a credible change in the policy-making environment that could help unlock the underlying strength in the balance sheets of corporates, plutonomists and emerging market consumers.

Against the motion

Michael Biggs
Superficially similar, fundamentally different
The "Japan Redux" view argues the US is currently over-indebted, and the need to de-lever will weigh on demand growth just as it did in Japan in the 1990s. We argue that what is important for demand growth is not the level of credit growth, but rather whether credit growth is rising or falling. From this perspective Japan and the US are opposites - whereas credit growth was positive but falling in Japan, it is negative but rising in the US. The US is in the rare position that it can achieve strong credit-driven spending growth even as private sector balance sheets are repaired.

David Fuller's view Needless to say, the answer to the headline question above could not be more important for investors, and not just those with US equities and fixed interest holdings.

This is not the first time that the possibility of the USA and also Europe following Japan's path has been discussed in Fullermoney. The comparison was first raised after the US Tech bubble burst in 2000. However, I have never seen the debate discussed more comprehensively than in this report from Deutsche Bank and the graphics are compelling.

I have assumed all along that the USA would not follow Japan's path, although it is a subject which challenges my objectivity and is capable of inducing troubled sleep. If I am wrong, the consequences will be much lower US long-dated Treasury yields and an economic environment closer to the depression that a not insignificant number of analysts have mentioned, if only in fear.

If any region of the globe follows Japan's path over the next decade or more, I think it is more likely to be Europe, although this too can be avoided with better economic governance.

As for the USA, there is little that I can add to the debate beyond the informed contributions of Ajay Kapur, Binky Chadha and Michael Biggs in the report above. However, I can string together a few bullet points which seem relevant to me:

Japan's bubble was even bigger on a per capita basis. The BoJ imposed a monetary squeeze for much longer than the Fed and perhaps more importantly, has been far slower to err on the side of inflation. Japan's demographics are much weaker and the population continues to decline. Japanese banks were further handicapped by the number of bad debts from zombie companies.

While Japan's multinational companies are formidable competitors, they have been less successful in becoming the Autonomies that we see in the USA, partly because they are mainly in the manufacturing sector which is increasingly the Asian region's strength, led by China, South Korea and Taiwan. In contrast, many of the USA's Autonomies are in consumer sectors. The history of WW2 has also worked against Japan in the Asian region.

Until recently, Japan had one-party rule. The rapid rotation of Japanese prime ministers is a sign of disfunctionality. With a robust two-party system the USA is in a better position to find inspired economic governance, although it has yet to do so in my opinion. A key starting point, I suggest, would be to clarify and simplify the tax code in a manner that is not just redistributive but internationally competitive and incentivises the entire population.

Here is an interesting report on some bipartisan suggestions in this Bloomberg column by Erza Klein: Ron Wyden, Senator From Planet Where Congress Works.