It might have been premature to assume the Geithner legacy toxic asset plan might end the recent spate of parallel-drawing between the US c.2009 and Japan 1992-2001.

But this time around, US moves appear to be unleashing a new wave of Japanese comparisons, not least a guest post on NakedCapitalism on Wednesday, in which Edward Harrison of Credit Writedowns says the Geithner Plan is inadequate because “it assumes illiquidity where insolvency is the problem”. Nevertheless, he suggests, the liquidity being thrown at the US economy by the latest – and other – stimulus plans is so great that it may induce a cyclical upturn. That’s essentially what happened in Japan in the 1990s, says Harrison.

He cites a post from last year on some of Japan’s big bailouts, and concludes:

I do hope we can avoid the worst-case scenario here.  However, I am concerned that the Obama Administraton and the Federal Reserve are literally papering over the problem with half-measures.  America is turning Japanese. hether they recognize this fact or understand the consequences their actions is unknown.

Other pundits favour a recent CSIS presentation by Nomura Research Institute’s Richard Koo, which in the words of Gaius Marius illustrates “the massive if somewhat accidental triumph of  Japanese fiscal policy in the 1990s as well as the desperate need of massive government deficit spending today to avoid the dire economic consequences of a debt deflation”.

But our favourite “lessons from Japan” presentation of recent weeks is one by Richard Katz, author, commentator and editor of the Oriental Economist, who laid out his view in full, technicolor detail in testimony to the Congressional Oversight Panel on March 19.

His “lessons for US from Japan’s banking crisis” has just been published, and kicks off with a highly salient point:

Japan’s experience is mostly a lesson in mistakes to avoid. In addition, the banking crisis in Japan has very different roots from the American problem. In Japan, the root of the problem was in plain vanilla loans because too many nonfinancial companies were losing money.

The banking crisis reflected a crisis in the real economy. Too many firms made products that were not worth what it cost to make them. The losses on bad debt added up to 20% of GDP. Behind every bad debt was a “bad borrower” that needed to be downsized or even liquidated. But, given the weakness of Japan’s governmental social safety net, a person’s current job at their current employer was the main social safety net. Fear of job losses and corporate failures made policymakers reluctant even to admit the problem, let alone solve it.

It took Japan ten years before it seriously began to resolve the bad debt problem at the heart of the banking crisis. The presence of money-losing zombies willing to cut prices to the bone in order to survive made it difficult for healthier firms to sell at profitable prices. Because of the life support given to the zombies by the banks, most of the firms that ended up going under were often more efficient than those who were propped up due to political connections. To some degree, it was survival of the least fit. 

But in the US, he notes, “the converse is true”:

It is not problems in the real economy that are causing a financial crisis, but a financial crisis that is causing problems in the real economy. Outside the auto sector, most US nonfinancial companies are in good shape. There are far more losses due to markdown of derivatives than from actual defaults on loans. 

Encouragingly, in his recent Foreign Affairs article (March/April 2009 edition) he concludes:

The financial crisis of 2008 need not usher in a replay of Japan’s “lost decade” of the 1990s. The current crisis is the result of correctable policy mistakes rather than deep structural flaws in the economy. 

Back in Japan itself, as Tokyo struggles to put together a third stimulus package, news comes on Wednesday of yet another record drop in the country’s exports in February – down nearly 50% from a year ago. But in a fine illustration of how much can be masked by figures, the country ended up posting a small surplus for February.

As the FT reports, exports nearly halved in February, falling 49.4 per cent from a year earlier, as demand for Japanese goods plunged in key markets. The decline was the steepest since 1957 and worse than most economists had anticipated.

But…because imports also fell much more than expected, dropping 43 per cent amid declining corporate earnings and rising unemployment, Japan actually ended up posting a trade surplus in February for the first time in five months. Thus, Japan’s trade balance showed a small surplus of Y82.4bn, after suffering a record deficit of Y952.6bn in January.

It is, however, not the kind of trade surplus that is cheering anyone up in Tokyo. Nor is it the kind that can provide a whole lot of new lessons for the US.

This entry was posted by Gwen Robinson on Wednesday, March 25th, 2009 at 8:55 and is filed under Capital markets. Edit this entry.