Are We Still Following Japan Off a Cliff?

A few months ago, I wrote about the potential for American markets to stagnate like Japan's Nikkei index (INDEX: ^N225), which since 2009 has shed about 5% in value while the S&P 500 (INDEX: ^GSPC  ) posted an almost 50% gain, the Dow Jones Industrial Average (INDEX: ^DJI  ) a 40% gain, and the Nasdaq (INDEX: ^IXIC  ) an 80% gain. Now with more data, let's revisit the possibility that a Japanese-style American slowdown is like one of those fancy technologies that makes its way to the U.S. only after appearing in Japan a decade earlier.

Japan's "lost decades"                                                         
Recently, other measures have been used to show that Japan has improved in several ways during what has been labeled its "lost decades." Low unemployment, increasing life expectancies, and more leisure time are just a few metrics that demonstrate this. However, if you were an investor during this time, you would've had a tough time finding returns. The Nikkei hit its high of 38,957 yen in 1989, then Japan's property bubble burst, and now the Nikkei sits at 8,440 yen. And what about socking money away with bonds? This brings up the first similarity to the U.S. -- falling bond yields:

Japan's bubble peak is set at 1991, while the U.S. is set at 2006.

Japan's bubble peak is set at 1991, while the U.S. is set at 2006.

U.S. bond yields are at their lowest levels since at least the start of the 19th century, according to Reuters. When equities are seen as risky, more investors choose safe, government bonds, which drives those bonds' yields downward.

Another large bond buyer
Also driving yields downward are the central banks, which use quantitative easing to purchase assets like bonds to inject money into the economy and help spur a recovery. This tactic is used after central banks have exhausted the limit of their previous tool for bolstering an economy: interest rates. This is our second similarity with Japan:

The Federal Reserve expects to raise its rate in a few years, but Japan has kept its rate below 1% for more than 15 years. Why is this a bad thing? Some argue that this zero interest-rate policy, or ZIRP, leads to a liquidity trap, where our preference for cash is greater than the growth rate of the money supply. Because of this preference, central banks can't boost consumption through increasing the money supply.

Beyond central banks
While money injections and low rates may not work, perhaps lower taxes or government spending will. But with these types of stimulus packages that spend more and tax less, governments are forced to borrow more. Here is another U.S. similarity to Japan that persists (also note the revision upward for the newest data that the IMF released):

Dotted lines are projected.

Dotted lines are projected.

Depending on your school of thought, the fact that the U.S. debt-to-GDP figure outpaces Japan's response in the 1990s might be good or bad: good for those who think Japan's stimulus was too little, and bad for those who fear the consequences of writing checks that future generations will pay.

Another similar losing investment
While bonds offer lower yields, central banks pull every lever they have, and governments spend, real estate values keep falling. Starting at the peak of Japan's housing bubble in 1991, the Urban Land Price Index, which measures Japan's land value trends, has declined every single year. Starting at the peak of the U.S. housing bubble in 2006, the Case-Shiller Index, which measures price changes in 20 major U.S. metro areas, has recently resumed its downward trajectory:

Finally, the differences
Japan's culture and demographics are much different from America's, like the fact that America's population is growing at about 0.9% per year, while Japan's is shrinking by 0.08%. While it seems many of these charts show similar directions, our differences could be the distinction in avoiding a massive Japanese-style downsizing of major indices. Or maybe that's just thinking that all our children are above average.

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Fool contributor Dan Newman holds no position in any of the above companies and would like to be on location for his next Japan story. Follow him at Twitter, @TMFHelloNewman. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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