Is the United States the Next Japan?

As if someone flipped a switch, Japan fell from economic powerhouse to long-term basket case. Is America doomed to suffer the same fate?

Despite the feverish efforts of policymakers, including a new round of money printing by the Federal Reserve, the U.S. economy continues to dance on the edge of oblivion. Job growth has stalled. The stock market sits just a couple of percentage points above where it was a year ago. Fed up and fearful, investors are throwing their cash at the seemingly safest asset class of them all -- Treasury bonds -- and pushing long-term interest rates to historical lows.

Now, some are wondering whether America is destined to repeat Japan's 20-year battle with deflation, or falling prices, a bear market for stocks and housing, and relentless recessionary pressure.

According to Merrill Lynch strategist Michael Hartnett, this "Japanification" of our economy would be dismal: Interest rates would remain near 0% through 2020; the economy would grow at an average annual rate of just 1% over the next 20 years; the Dow Jones industrials ($INDU) would drop below 4,000; and home prices would fall an additional 46% by 2030.

Even after all we've been through over the past three years -- 7.3 million lost jobs, government bailouts, foreclosures and stock market losses -- this may be a bit too hard to believe. Yet many investors are already preparing for this dark future.The bond bubble speaks To be sure, the pessimists are about to be thrown some red meat. After being dealt a one-two punch by the European debt crisis and the fading of government support initiatives, the U.S. economy is stalling. Because of less construction work, fewer exports and smaller inventories, the government on Friday is expected to downwardly revise its initial estimate of growth of gross domestic product in the second quarter to just 1%.

This is whipping up fear on a scale not seen since early last year. In fact, the demand for safer investments is so great that in places such as the United Kingdom, government bonds are offering yields below the prevailing inflation rate. In the U.K., 10-year yields on those bonds fell below 3% last week, while consumer inflation stands at 3.1%.

Japan's boom and bust

With talk of bankers whipping up support for exotic 100-year corporate bonds (remember talk of exotic mortgage securities back in the go-go housing days?), people are increasingly worried that a bond bubble -- a bubble in pessimism -- is beginning to develop. I'd include myself in that camp.

Not so, says Julian Jessop, the chief international economist at Capital Economics. In a recent note to clients, he said he sees "no compelling reason why bond yields cannot remain close to their current lows, or even fall further." Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=49d7b6c7-3f96-4c2b-a6a7-ddb1f1bc3c6a,78032985-5b90-4aa7-aa2d-c6ee25e46f9d,06f75981-0fed-4ff5-9902-be10ac834b45,5eecdc02-8fad-4c31-9db6-f97c4c42ad0d,c260772e-45af-4aba-85ef-be300ab46a3a", "player.fr": "iv2_en-us_money_article_16x9-Investing-Extra"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=49d7b6c7-3f96-4c2b-a6a7-ddb1f1bc3c6a,78032985-5b90-4aa7-aa2d-c6ee25e46f9d,06f75981-0fed-4ff5-9902-be10ac834b45,5eecdc02-8fad-4c31-9db6-f97c4c42ad0d,c260772e-45af-4aba-85ef-be300ab46a3a;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4'); Why?

Simply put, we've yet to see bond yields fall to levels that couldn't be justified by fundamentals. Jessop writes that "the current low levels of bond yields are consistent with the prospect of a very long period of near-zero short-term interest rates, low or negative inflation and lackluster returns on other assets that increase demand for the safety of government bonds."

In other words, people are preparing for Japanification. And they're positioning their portfolios for deflation.

But what are the chances the U.S. will suffer the sort of malaise that has affected Japan since 1989?Stars align Just to be clear, I don't believe this nightmare scenario will come to pass. I'll explain why in a minute. But aside from the pessimistic economists and strategists warning of Japanification, market technicians are seeing signs that America's economic stars are aligning with Japan's. In fact, the Nasdaq Composite Index ($COMPX) is tracing out a pattern eerily similar to the one traveled by the Nikkei 225 ($N225) more than 10 years ago.

You can see this in the chart below, where the Nasdaq's March 2000 peak aligns with the Nikkei's December 1989 peak.Though the relationship isn't perfect, the pattern is remarkably similar, with a statistical correlation of 82%. That means the Nikkei predicts 82% of the movement in the Nasdaq.

Of course, this relationship could change. And the correlation broke down somewhat between 2003 and 2007. Still, that there is any relationship between seemingly random price movements that happened so far apart in time and space is pretty amazing.

The closeness of the fit between these two patterns suggests the U.S. is on the same boom-and-bust path that Japan followed 10 years ago. And if it continues, it suggests U.S. stocks won't find a final low until 2012.

Continued: We are not themMore from MSN Money

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8 bargain buys for the rebound

Is corporate America rusting away?

Cost of this time down: Stagflation

What if the jobs don't come back?

 1 | 2 | next >

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The United States is the ' new' Japan ... until oil prices ( which is priced in dollars and not yen ) get way out of hand.

 

The problem with both economies is 'STAGNATION.' Companies and organizations that should be allowed to fail are instead being put on 'permanent life support' via the Zero Interest Rate Policy instigated by central bankers.

 

That policy ... the ability to borrow money for next to nothing ... ensures those banking institutitions and those companies supported by said bankers ... which have access to such 'free money' ... can stay alive for a very, very, very long time.

 

Unfortunately, these 'zombie' corporations lack the structure, ability, need, etc. to allow new technologies to take hold that will replace the current hydrocarbon based transportation and energy technologies of today.

 

Only when the natural resource of oil becomes constrained ... for whatever reason ... will the U.S., the Euro nations, and Japan BE FORCED TO DEAL WITH THE CHANGE and XOM, F, GM, SNE, TM, TOL, and the like ... finally go away ... and new companies are formed which can 'make the change' happen.

ReplyReport AbuseP.O. Carl #28/25/2010 8:35 PMWhy wouldn't it happen here?  We did the same thing that Japan did.  We moved most all of our manufacturing out of the country.  And now, the government is trying to create jobs.  What kind of a job do you create when all we do here is finance, insurance and service?  The American consumer is not the super consumer of the past.  If there is not any increase in demand, why would any company increase output?  We are where we are going to be for a long time.    ReplyReport AbuseP.O. Carl #38/25/2010 9:21 PMStocks final low in 2012?  Isn't that when the Mayan calendar said the world would end??? ReplyReport Abuseshanshangr #48/25/2010 10:10 PMThat there is any relationship between seemingly random price movements that happened so far apart in time and space is pretty amazing.ReplyReport Abusesuyutang #58/25/2010 10:11 PMI don't think so.I don't believe this nightmare scenario will come to pass.ReplyReport Abusezhcgb #68/25/2010 10:12 PMThe stock market sits just a couple of percentage points above where it was a year ago. Fed up and fearful, investors are throwing their cash at the seemingly safest asset class of them all -- Treasury bonds -- and pushing long-term interest rates to historical lows.ReplyReport Abuse1 - 6 of 6PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/Extra/is-america-the-next-japan.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign-inMSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft

Simply put, we've yet to see bond yields fall to levels that couldn't be justified by fundamentals. Jessop writes that "the current low levels of bond yields are consistent with the prospect of a very long period of near-zero short-term interest rates, low or negative inflation and lackluster returns on other assets that increase demand for the safety of government bonds."

In other words, people are preparing for Japanification. And they're positioning their portfolios for deflation.

But what are the chances the U.S. will suffer the sort of malaise that has affected Japan since 1989?Stars align Just to be clear, I don't believe this nightmare scenario will come to pass. I'll explain why in a minute. But aside from the pessimistic economists and strategists warning of Japanification, market technicians are seeing signs that America's economic stars are aligning with Japan's. In fact, the Nasdaq Composite Index ($COMPX) is tracing out a pattern eerily similar to the one traveled by the Nikkei 225 ($N225) more than 10 years ago.

You can see this in the chart below, where the Nasdaq's March 2000 peak aligns with the Nikkei's December 1989 peak.Though the relationship isn't perfect, the pattern is remarkably similar, with a statistical correlation of 82%. That means the Nikkei predicts 82% of the movement in the Nasdaq.

Of course, this relationship could change. And the correlation broke down somewhat between 2003 and 2007. Still, that there is any relationship between seemingly random price movements that happened so far apart in time and space is pretty amazing.

The closeness of the fit between these two patterns suggests the U.S. is on the same boom-and-bust path that Japan followed 10 years ago. And if it continues, it suggests U.S. stocks won't find a final low until 2012.

Continued: We are not themMore from MSN Money

 1 | 2 | next >

The United States is the ' new' Japan ... until oil prices ( which is priced in dollars and not yen ) get way out of hand.

 

The problem with both economies is 'STAGNATION.' Companies and organizations that should be allowed to fail are instead being put on 'permanent life support' via the Zero Interest Rate Policy instigated by central bankers.

 

That policy ... the ability to borrow money for next to nothing ... ensures those banking institutitions and those companies supported by said bankers ... which have access to such 'free money' ... can stay alive for a very, very, very long time.

 

Unfortunately, these 'zombie' corporations lack the structure, ability, need, etc. to allow new technologies to take hold that will replace the current hydrocarbon based transportation and energy technologies of today.

 

Only when the natural resource of oil becomes constrained ... for whatever reason ... will the U.S., the Euro nations, and Japan BE FORCED TO DEAL WITH THE CHANGE and XOM, F, GM, SNE, TM, TOL, and the like ... finally go away ... and new companies are formed which can 'make the change' happen.

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