>Is the Faltering U.S. Economy in Danger
>Of Emulating Japan's Long, Slow Swoon?
>By JACOB M. SCHLESINGER and PETER LANDERS
>The Federal Reserve's decision to cut its benchmark interest rate to 2%, its
>10th rate cut this year, moves the U.S. central bank closer to the day when
>it runs out of rate-cutting ammunition. And that raises an unsettling
>question: Could the U.S. be going down the same dismal economic path trod by
>Japan a decade ago?
>With each passing week, the similarities increase. In the 1980s, Japan was
>considered the model capitalist economy; in the 1990s, the U.S. held that
>distinction. In both cases, the good times ended with the bursting of a
>stock-market bubble, pricked, at least in part, by a nervous central bank. In
>both cases, predictions of a quick turnaround proved to be wrong.
>The excessive American investment in fiber-optic high-speed phone lines
>echoes Japan's decade-earlier investment binge in memory-chip factories. The
>plight of one well-respected American company, Enron Corp. -- which has lost
>two-thirds of its market value in just three weeks -- is reminiscent of the
>previously invisible weakness Japan's slump exposed at many of that country's
>banks. Even the recent squabbling in the U.S. Congress that threatens to
>derail a package of economic-stimulus measures sounds eerily similar to the
>bureaucratic and political wrangling that stymied bold fixes in Japan. And
>now, U.S. monetary policy, considered to be the most powerful tool for
>countering the nation's downturns, is looking increasingly like Japan's, as
>interest rates fall toward zero. Japan has endured a decade of stagnation.
>Could that happen here? Most analysts continue to answer with a resounding
>no. They point out that Japan burst not just a stock-market bubble, but also
>a real-estate bubble, which in turn laid low its banking system. The U.S.
>bubble appears to have been limited to stocks, and the American banking
>system remains strong. U.S. policy makers also insist that they are wiser
>than their Japanese counterparts, in part because they have learned from
>Japan's mistakes. And, they add, the U.S. economic and political system is
>more flexible than Japan's and better able to make the necessary repairs.
>Not an 'Apt' Comparison
>"It's easy to raise the suspicion that the Japanese and American economies
>have some similarities," U.S. Treasury Secretary Paul O'Neill said in a
>recent interview."I don't think it's apt to make a comparison." Among other
>things, he says:"They're not an open economy. One of the things that has
>really been beneficial to our economy is this openness and the challenge that
>we have permitted to come in here, from foreign suppliers from all over the
>world...." Moreover, the U.S. central bank hasn't yet exhausted its
>rate-cutting options. In announcing its half-point rate cut Tuesday, the
>Fed's policy committee made clear that it remained poised to keep cutting
>rates down into the 1% range if deemed necessary."For the foreseeable
>future," it declared,"the risks are weighted mainly toward conditions that
>may generate economic weakness." U.S. markets have rallied in recent weeks on
>the assumption that the Fed still will be able to turn things around by next
>year. Indeed, after trading a bit lower Tuesday in the hours before the Fed's
>2:15 p.m. EST rate announcement, the Dow Jones Industrial Average soared
>150.09 points, or 1.59%, to finish at 9591.12, just 14 points below its close
>the day before the Sept. 11 terrorist attacks on the U.S. Fed Chairman Alan
>Greenspan continues to cling to his faith in the U.S. economy's future."The
>long-term prospects for productivity growth and the economy remain favorable
>and should become evident once the unusual forces restraining demand abate,"
>the Fed said in its statement Tuesday. Yet the Japanese were no less
>confident about their economy a decade ago, even as it slipped into prolonged
>crisis."Our foundations are solid," declared Bank of Japan Governor Yasushi
>Mieno, as he started cutting interest rates in 1991.
>Japan's Nikkei Stock Average peaked near 40000 in December 1989. But in 1991,
>when three leading economic institutes issued long-term forecasts for Japan
>through the next decade and beyond, each saw long-term economic growth
>continuing at between 3% and 5% a year. Instead, the country grew at an
>annual average of 1.1% between 1992 and 2000.
>In April 1992, as the Nikkei appeared to be hitting bottom at 17000, a
>consensus of a dozen top forecasters still foresaw Japanese economic growth
>for the following year at between 2% and 3%. It ended up growing 0.4%. Today,
>the Nikkei hovers around 10000, and the Japanese economy is back in its
>fourth recession of the past decade.
>One reason for the unexpected length and depth of Japan's decline is that its
>1980s bubble created a myriad of destructive excesses, many of which became
>evident only after the bubble popped. For example, it wasn't until 1991 that
>real-estate prices started falling -- and many analysts thought that decline
>would be temporary. It wasn't until the mid-1990s that economists saw how
>severely the fall in real-estate prices had hurt Japan's big banks.
>Those bad investments continue to haunt Japanese banks. The banks didn't lend
>so much directly to real-estate speculators; instead, much of the money went
>through intermediaries such as nonbank finance companies and construction
>companies. Today, many of those contractors are near insolvency, and the
>banks may have to take huge write-offs."We recognized that it would take a
>long time to be fixed, but even so, we thought that would mean two or three
>years," Yoshimasa Nishimura, a former head of the Japanese Finance Ministry's
>banking bureau, says of the bubble.
>Excess Capacity
>And it took manufacturers many years to recognize that the capacity they had
>built up during the bubble was never going to be used. Auto makers
>manufactured 13.5 million vehicles, including trucks and buses, in Japan in
>1990. The number fell off gradually after that and now stands at about 10
>million per year. For years, companies kept excess capacity and workers,
>betting that the falloff was temporary. When Japan's economy first slowed,
>there was widespread confidence that its government could easily manage the
>downturn. In the 1980s, the country's fabled bureaucrats had a sterling
>reputation for economic management, much as Mr. Greenspan did in the U.S.
>during the 1990s. With short-term interest rates at 6% and a budget surplus
>of 8.8 trillion yen ($72.3 billion) -- or 2% of gross domestic product -- the
>Japanese central bank and parliament had plenty of room to cut rates, cut
>taxes and boost public spending. The Bank of Japan did ultimately cut rates
>by almost all six percentage points. Politicians used the full surplus and
>even let the government run a primary budget deficit -- or deficit excluding
>bond issuance and repayment -- of 11 trillion yen, or 2% of GDP. But they
>acted too slowly and in the end failed to jump-start the economy.
>American policy makers give themselves higher marks for speed of response.
>The Fed has cut interest rates by 4.5 percentage points in just 10 months. It
>took the Bank of Japan more than 4 1/2 years to do the same.
>Moreover, the U.S. Congress has turned unprecedented budget surpluses into
>almost certain deficits with equal dispatch, passing a massive $1 trillion,
>10-year tax cut earlier this year and rapidly approving $40 billion in
>stimulus measures and a $15 billion airline bailout in the wake of the Sept.
>11 terrorist attacks. Members of Congress now are caught up in a stalemate
>over a plan for $75 billion to $100 billion in additional stimulus actions,
>but that, too, has a good chance of enactment before year's end. The Japanese
>Diet, on the other hand, dallied for a year and a half before passing its
>first stimulus package.
>Even more important than the speed of America's policy makers, though, may be
>the flexibility of the American economy itself. Analysts say the U.S. economy
>has a more self-cleansing form of capitalism that discourages the many
>excesses that built up in Japan during the 1980s.
>A decade ago, the Japanese boasted of having found the secret formula for
>smoothing out free-market business cycles. Companies had friendly
>shareholders as well as bankers who provided"patient capital" that allowed
>for long-term technological investments in spite of weak quarterly earnings.
>Lifetime employment guarantees gave workers a sense of income security,
>encouraging them to keep spending during downturns. In retrospect, those same
>traits seem like weaknesses -- factors that shielded Japanese companies from
>the free-market pressures that would have made them more efficient. The U.S.
>system, by contrast, is considered better equipped to shift resources from
>unproductive to productive uses.
>Even today, after the decade-long slump, the Japanese company Matsushita
>Electric Industrial Co. refuses to lay off any of its 130,000 employees in
>Japan, despite losses that are expected to exceed $2 billion this year.
>That's a far cry from U.S. companies, such as International Business Machines
>Corp. and AT&T Corp., which laid off workers even during the boom years,
>freeing up technology talent to go to newer, fast-growing rivals such as Dell
>Computer Corp. or Cisco Systems Inc.
>In part, it is U.S. policy makers' willingness to inflict short-term pain
>that allows for that flexibility. American officials argue that Japan would
>have come out of its crisis more quickly if it had handled its banking crisis
>the way the U.S. handled the American savings and loan crisis in the 1980s.
>Back then, U.S. government-ordered thrift shutdowns and foreclosures caused
>shareholders to lose their investments and borrowers to lose their
>properties. In Japan, failed banks were propped up, and their problems
>allowed to fester.
>Still, American-style free markets are hardly immune from excesses, and more
>and more become apparent the longer the economy idles. Telecom companies
>spent tens of billions of dollars to lay tens of millions of miles of
>fiber-optic cables, an estimated 2.6% of which is now being used.
>Blue-chip American Express Co. ended up writing off more than $1 billion in
>junk-bond investments that were considered relatively low risks until the
>economy went sour."Subprime" lender Providian Financial Corp. sent its
>earnings and stock price soaring in the late 1990s by tapping the once
>largely ignored pool of consumers with checkered borrowing records. Providian
>insisted that it used sophisticated models to limit its risks. Nonetheless,
>it ended up announcing a surprising 71% drop in third-quarter earnings last
>month, and its stock fell by more than half.
>More surprises are almost certainly in store. Many analysts argue that the
>U.S. stock market -- even at more than 25% below its peak -- remains a bubble
>waiting to deflate further. The Standard & Poor's 500-stock index still is
>trading at a price-to-earnings ratio of between 21 and 28 times earnings,
>depending on the measurement, and would need to fall at least 30% to reach
>its historic average P/E ratio of 15, according to the Leuthold Group, a
>Minneapolis-based investment research firm.
>Surge in Borrowing
>To some analysts, the large amount of consumer debt outstanding in the U.S.
>is the ticking time bomb that could rival the bad loans dragging down
>Japanese banks. American households borrowed freely and dipped deeply into
>savings during the 1990s. In good times, with wages and stock portfolios
>rising, the situation seemed manageable. But now, as income-growth slows and
>mutual funds shrink, the burden could spin out of control. The Fed estimates
>that the household debt-service burden -- the ratio of debt payments to
>after-tax income -- rose above 14% earlier this year for the first time since
>1987. At about the same time, the number of Americans filing for personal
>bankruptcy hit a record 390,064.
>One reason for the surge in American borrowing has been a sharp increase in
>the number of new home mortgages and a wave of mortgage refinancing to take
>advantage of falling interest rates and rising home values. Both home sales
>and consumer spending, backed by rising housing values, have been rare bright
>spots over the past year in an otherwise dismal economy.
>But there are dangers as well. One concern: that the sharp rise in home
>prices over the past four years -- nearly 20% nationally, when adjusted for
>inflation, and more than 60% in hot markets such as Silicon Valley, according
>to the Office of Federal Housing Enterprise Oversight in Washington -- could
>turn into a miniature version of Japan's real-estate bubble.
>Another worry: that America's housing market isn't driven entirely by
>free-market forces. Rather, this theory goes, it is propped up by Japan-like
>government subsidies and easy loan terms made possible by widespread
>assumptions that the government would pick up the tab for any defaults.
>The nation's mortgage market is dominated by Fannie Mae and Freddie Mac,
>government-chartered companies that are shareholder-owned but still enjoy
>various implicit and explicit subsidies, such as tax breaks and an emergency
>line of credit from the U.S. Treasury. The two Washington-area companies
>don't actually issue mortgages themselves. Instead, they buy mortgages from
>lenders and repackage them into tradable securities. In doing so, they play a
>major role in influencing the size and shape of the market by setting
>underwriting standards for the loans they purchase.
>Some conservatives -- including the Fed's Mr. Greenspan -- have expressed
>concern that Fannie and Freddie, by using government subsidies to expand the
>housing market, create distortions, drawing capital away from more productive
>uses. The Congressional Budget Office estimates that the two companies last
>year enjoyed subsidies totaling $10.6 billion -- a number they say is
>exaggerated. Other critics say that the companies encourage more, and
>riskier, lending than a completely free market would allow -- a pattern that
>may sustain housing demand in the near term but raises the risk of a bigger
>bust down the road. Japan's woes have been exacerbated by formal and informal
>government backing for lenders. That includes a Government Housing Loan Corp.
>that gets a $3 billion annual subsidy and a separate state-run loan guarantee
>program that keeps many technically bankrupt small businesses afloat.
>Fannie Mae Chairman Frank Raines rejects the notion of any similarity between
>his company and Japanese-style subsidies."Their mortgage corporation has no
>private-market discipline -- there is no private management, no private
>equity capital, no private debt capital." Fannie, he says, has all three, as
>well as tight regulatory standards requiring the company to keep enough
>capital on hand to withstand a catastrophe. The company's private
>shareholders, he adds, have every incentive to prevent overly risky lending,
>since they would lose their investments even if the government were to
>intervene to back the loans. Elsewhere on the business front, the vaunted
>flexibility of the American economy -- while perhaps raising efficiency in
>the long run -- could also serve to intensify a downturn. American
>corporations' readiness to resort to layoffs at the first sign of weakness
>risks battering consumer confidence. In the past three months alone, the
>unemployment rate has soared by nearly a full percentage point -- to 5.4% in
>October from 4.5% in August, and the U.S. jobless rate once again exceeds
>Japan's, which after a decade of stagnation still is 5.3%.
>Fragile Safety Net
>Even workers supposedly protected by union contracts have a fragile safety
>net. In the wake of the terrorist attacks, major airlines, such as AMR Corp's
>American Airlines and Delta Air Lines invoked force majeure clauses in their
>labor contracts, allowing them to skirt many negotiated protections and dump
>workers without advance notice. Partly as a result, the Conference Board's
>index of consumer confidence plunged to 85.5 in October from 114 in August,
>one of the swiftest declines on record. While Japan's unique circumstances
>may account for some of its problems, they also may demonstrate a broader and
>more disturbing point: that policy may at times be relatively powerless to
>contain the destructive forces of a bursting bubble.
>As companies are saddled with excess capacity, they have little incentive to
>borrow to expand, no matter how low interest rates fall. Even after the sharp
>drop in capital spending over the past year, the percentage of industrial
>capacity in use in the U.S. in September was just 75.5% -- the lowest level
>since 1983 and hardly an inducement for companies to build new factories.
>Layoff-spooked consumers also may be unwilling to spend tax rebates enacted
>to encourage shopping. A recent University of Michigan survey concluded that
>just over one in five households have spent the rebate checks mailed out this
>summer, with the rest tucking the money into savings or using it to pay debt.
>At the extreme, the supply overhang from a collapsing bubble can touch off a
>dangerous cycle of deflation, or falling prices. In a deflationary
>environment, consumers curb spending, waiting for goods to become still
>cheaper in the future. Borrowers get crushed by debt burdens as their loans
>become more expensive in relative terms. Companies, forced to keep cutting
>prices, cut back on workers and purchases of supplies, spreading pain
>throughout the economy.
>In Japan, deflation got under way in earnest in 1998 after the collapse of a
>major bank and securities company. In both 1998 and 1999 wholesale prices
>fell 1.5%, and after a flat year in 2000, they are falling again in 2001. The
>U.S. isn't there yet. But commodity prices have fallen sharply since 1998,
>while U.S. consumer prices, by some measures, appear to be slipping. The
>Commerce Department reported last week that its favored measure of inflation
>-- the price index for gross domestic purchases, or prices paid by U.S.
>residents -- fell by 0.3% in the third quarter, a sharp reversal from the
>1.3% increase in the second quarter and the first quarterly decline in nearly
>40 years. (Analysts say the number was artificially depressed by one-time
>factors relating to Sept. 11 -- insurance benefit payouts that, for
>measurement purposes, lower insurance prices.)
>
>In a deflationary world, the central bank's powers to respond are diminished
>because monetary policy works most effectively if interest rates can fall
>below the rate of inflation. But rates can't do that if inflation falls below
>zero. Write to Jacob M. Schlesinger at jacob.schlesinger@wsj.com
>and Peter Landers at peter.landers@wsj.com.
>
>PS: Hervorhebung durch mich.
>El Sheik


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