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No. 19 — May 14, 1999

Feature Article

"BUBBLE" TROUBLE IN AMERICA? LESSONS FROM JAPAN by Douglas Ostrom

Summary

While the U.S. economy looks like it is getting stronger and stronger and the stock market breaks through one barrier after another, Japan's economy continues to struggle, with its equity market mired in the same range that it was in in the 1980s. A decade ago, the positions of the world's two biggest economies largely were reversed: America seemed to be unable to create reasonable growth, while the booming Japanese stock market appeared to herald the arrival of a juggernaut.

Beginning in 1989, Japan's situation started to deteriorate. With the benefit of hindsight, most observers agree that in the late 1980s, Japan experienced a "bubble" that artificially inflated its economic performance and whose bursting has had consequences that, to this day, still adversely affect the functioning of the economy.

This reversal of fortune naturally provokes the question as to whether it soon will be America's turn to suffer the wrenching process that Japan has endured. Not a few Japanese analysts hint that it could be. In addition to the stock market's performance, certain other aspects of the two situations are eerily similar. As in Japan earlier, for example, American consumer spending, partly a consequence of rising equity prices and the resulting increased wealth, has stimulated aggregate demand, boosting the economy's growth rate.

Yet the differences also are important. Most suggest that the stock market bubble, if there is one, is less severe than it was in Japan, in part because the run-up in prices is fueled far less by the rising prices of other assets, notably real estate. In a worst-case, "hard-landing" scenario, the United States would take a substantial but manageable hit. Significantly, other nations, Japan included, would suffer almost as much but would be in a weaker position to absorb the blow. For the second-largest economy in the world, the spillover from a meltdown of U.S. equity prices could come before it has fully recovered from the impact of its own burst bubble almost a decade ago.

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Weekly Review

JAPAN'S LENGTHY RECESSION INCREASES JOBLESSNESS, EXCESS CAPACITY by Douglas Ostrom

Nearly four decades ago, President John F. Kennedy famously proclaimed that "a rising tide lifts all boats" to describe the process of recovery from an economic downturn. Policymakers in Japan today may want to rework that expression a bit. Not only has the lengthy recession run many "boats" aground, but it also has revealed festering problems that long lay just below the waterline. Although some senior officials see evidence that corporations are clearing away this debris, firms themselves appear to hope that a rising tide again will conceal the eyesores.

 

NEW BILATERAL PACT HAS UNCLEAR IMPACT by Jon Choy

One concrete result of Prime Minister Keizo Obuchi's official visit to Washington (see JEI Report No. 18B, May 7, 1999) was an agreement that reiterated and expanded a previous transpacific pledge to promote mutual inward foreign direct investment by improving the regulatory, tax and business environments. The pact includes many changes already planned by Tokyo but weaves them together to form a more coherent approach. The document also calls on Washington to take several steps to enlarge the American welcome mat for foreign investors.

 

JAPAN PLEDGES SUPPORT FOR ASIAN DEVELOPMENT BANK by Marc Castellano

Financial restructuring and replenishing the Asian Development Fund, a primary source of financing for developing Asian economies, topped the agenda of the Asian Development Bank's April 30-May 2 annual board meeting in Manila. The money available to the ADF, the funding vehicle for loans extended on below-market terms, is dwindling rapidly because of the regional development bank's response to the East Asian economic crisis.

 

FOREIGN MINISTRY BLUE BOOK WARNS OF DIVERSE SECURITY THREATS by Barbara Wanner

Citing North Korea's missile launch over Japan last August, nuclear weapons tests by India and Pakistan in May 1998 and the continued reverberations from the financial crisis that started in Thailand in July 1997, the Ministry of Foreign Affairs' 1999 diplomatic blue book portrayed an increasingly diversified menace to global peace and stability. The fluidity and the unpredictability resulting from the further breakdown of Cold War-era power politics required that Tokyo pursue a "comprehensive and independent" diplomacy in 1998, according to the annual report on Japan's foreign policy. Moreover, since these varied security threats will continue well into the 21st century, it remains important for Japan to continue a multipronged approach to managing its external relations, the Foreign Ministry said.

 

NOTES

Despite increased public outcry against land mines and international efforts to ban their use, these antipersonnel devices continue to be employed in a number of conflicts, notably in Kosovo and in the African countries of Angola, Guinea-Bissau and Senegal. According to United Nations estimates, the 110 million-plus land mines that remain hidden and unexploded around the world cause more than 2,000 civilian casualties each month. An additional 250 million land mines are stockpiled worldwide.

The International Trade Commission will decide in early June whether unfairly priced carbon hot-rolled steel products from Japan caused or contributed in any way to the U.S. steel industry's self-described crisis condition. The Department of Commerce stuck the independent federal agency with this unenviable job when it concluded April 29 that made-in-Japan supplies of commodity hot-rolled products were sold in the United States at less than fair value.

 

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