How The U.S. Economy Differs From Japan's
October 18, 2002
Nothing scares the wits out of U.S. investors like our economy being compared to that of Japan -- which has been moribund for over a decade -- with stocks there recently hitting a 19-year low.
But economists say such comparisons are ill-founded.
- The chief difference between the way the U.S. economy works and the way Japan's does is that theirs isn't really capitalistic in the way ours is.
- Bank loans there account for nearly 60 percent of all corporate debt, while in the U.S. nearly 61 percent is capital market debt -- which tends to determine prices quickly and ruthlessly, rather than deferring the pain, which the bank-based system does.
- In 1990, after a decade in which companies in Japan routinely borrowed like mad against inflated real estate and poured money into the stock market, Japan's ratio of total corporate debt to gross domestic product was 225 percent -- but is only 95 percent in the U.S. today.
- Once the stock market crashed in Japan, with real estate prices following, Japan's banks were effectively immobilized by the scale of their losses.
For 10 years, Japanese banks have avoided pulling the plug on their dead loan accounts and lending to new customers who might create jobs. This differs from capitalistic practice in the U.S., in which banks first try to work out repayment schedules with troubled corporate customers before foreclosing. U.S. banks will take that step as soon as it is obvious a loan can't be repaid -- rather than leaving the inevitable loss to fester over the years.
In short, the creative destruction that should have taken place in the Japanese economy wasn't allowed to happen.
Source: Bill Powell, "We're Not Turning Japanese," Fortune, September 30, 2002.
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