Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  Lessons from Japan?
Posted Under: Government • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending • Stocks

Thirty years ago, many in the US were in fear that a rising power in Asia was on the verge of eclipsing the US.  Now it's China, back then it was Japan.

Back in the late 1980s Japan had become the second largest economy in the world after the US and seemed like a juggernaut that couldn't be stopped.  Many center-left economists thought that the post-World War II experience of Japan proved that industrial policy could work, with the government picking winners and losers and making sure favored industries and companies always got the credit they needed to grow.  They were eager to bring that approach to the US. 

History, however, had other plans.  Japanese government policies bottled up capital in favored industries and pulled it away from widespread entrepreneurship.  This meant the massive savings generated by Japanese workers were misallocated into a limited pool of domestic assets, with capital gains tax rates that favored listed stocks and drove up real estate prices.  The result was dual massive bubbles, with stocks far more overvalued than US stocks were in 2000 while Japanese real estate was far more overvalued than the US was in 2005.  As a sign of how large that bubble was, the Nikkei is still about 40% below the high set in 1989. 

That peak in asset prices also coincided with a dramatic slowdown in economic growth that has lasted thirty years.  To put an exclamation point on that, Japanese real GDP fell at a 6.3% annual rate in the fourth quarter of 2019.  This was before any impact from the coronavirus and the largest quarterly decline in six years.  While pandemics are serious and scary, the real cause of the drop was a national sales tax hike from 8% to 10%.  Real GDP is now down 0.4% from a year ago.

It's deja vu.  Japan keeps trying over and over again to boost economic growth with government policy – a combination of high government spending, high budget deficits, high taxes, quantitative easing, and, beginning in 2016, negative interest rates.  Sounds exactly like what policymakers in Europe have tried, but more of it and for longer.

None of this has worked, and it won't work in the US, either.  Not now, and not if we eventually go into a recession, which, thankfully we don't foresee anytime soon. 

In contrast to Japan, the US has lower taxes, lower (but still too high) government spending, a central bank that maintains positive short-term interest rates, and a much healthier economy, with equities at or near record highs while the jobless rate heads toward what could be the lowest unemployment rate since the Korean War.  

Instead of more of the same, we think Japan would benefit from shifting the mix of policies toward the supply-side, with big tax cuts on business investment and profits, and ending negative interest rates like Sweden just did.  And, given a falling population, this could be coupled with much larger tax deductions for parents.

Meanwhile, instead of raising the sales tax, with long-term interest rates at essentially zero, Japan should take a page from Great Britain's history and convert their debt into "perpetual" securities (called "consols"), paying whatever interest rate the market demands (near zero!) but without the need to repay principal.

Don't hold your breath waiting for this kind of policy shift.  Instead, Japan looks poised to continue to muddle through continuing to believe that government can manage economic growth and not trusting entrepreneurs and freedom.  Unless Japan starts trusting supply-side policies instead of demand-side fallacies, they will continue to be doomed to make the same mistakes.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here  for PDF version

Posted on Tuesday, February 18, 2020 @ 11:49 AM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
 PREVIOUS POSTS
M2 and C&I Loan Growth
Industrial Production Declined 0.3% in January
Retail Sales Rose 0.3% in January
The Consumer Price Index (CPI) Rose 0.1% in January
Jobs, Coronavirus, and the Budget
M2 and C&I Loan Growth
Nonfarm Payrolls Rose 225,000 in January
Nonfarm Productivity Increased at a 1.4% Annual Rate in the Fourth Quarter
The ISM Non-Manufacturing Index Increased to 55.5 in January
The Trade Deficit in Goods and Services Came in at $48.9 Billion in December
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.