A Forex View From Afar

Japanese Asset Bubble

Written by A Forex View From Afar on Thursday, April 03, 2008

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Via the WSJ's Economic Blog, Societe Generale strategist Albert Edwards writes that the U.S. could see an asset bubble similar to the on from Japan, during the 90s, or even worse.

Mr. Edwards has been making Japan comparisons ever since the dot-com bubble burst. Many people disagreed with such assessments, pointing out that U.S. banks and real estate were in far better shape. That’s not the case anymore, says Mr. Edwards, who also notes that Japan didn’t experience a real credit crunch until years after the bubble burst in 1990. And while there’s a view that Japanese banks were glacial when it came to writing off bad loans, part of the problem was that bad loans kept on turning up as the situation worsened. Sound familiar?

What could make the U.S. situation worse, he says, is that Japan’s citizens had deep reserves of saving to tap into, whereas the U.S. personal savings rate is near zero. Japanese companies were unwilling to fire people, which, while it may have made for a sclerotic economy, helped prop up spending.

Even if I agree we are now felling the Bubble Bursting, similar to the Japanese 90s style, it definitely won't be at that magnitude and scale; after 18 years Japan isn't fully recovered. From the stock market point of view, at the time of the Burst, the Nikkei was topping at 40,000 points, now it stands at 13.000, 18 years later. Who knows how much time will need to recover?

Another good counter-argument would be that US didn't have enough time to "prepare" for such a bubble. We already had a bubble burst from 2001 to 2003, which cleared some inflated parts. From 2003 to 2007 there wasn't too much time to have reached the level of Japan's bubble, but it's obvious that the ones who are to blame for the bubble, bank and money regulators through easy lending, had a real rush. Trust me, 5 years between two bubbles burst is very bad.

Interestingly part of the blame for the Japanese bubble was placed on the fiscal policy, with financial markets deregulated and loose tax policy. From 2003 to 2007, we got them both, through Bush Tax Cuts and deregulated markets. Remember the speeches about the financial advantages of deregulated markets? I do.

About national debt, I'll have to agree with Mr. Edwards. The US is an economy which has developed in the last years through credit, taking the saving rate to the negative territory.

We'll have to see now how the US economy will cope without the debt machine, because US consumers are already late on credit payments, and at the highest level in 15 years.

Sources:
WSJ: U.S. Situation Could Be Worse Than 90s Japan

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