Japan Issues Warning to America: A Lesson in Economic Missteps
Last week, Japan experienced a rapid depreciation of its currency, the yen, against the U.S. dollar and other global currencies. This event sparked concern and panic in financial markets and among observers, as it raised fears of a currency and financial markets crisis in Japan. Once viewed as the “sick man of Asia,” Japan’s economic decline serves as a cautionary tale for the United States.
Not too long ago, Japan was the envy of the world with its postwar recovery and subsequent economic miracle, making it the world’s second-largest economy after the United States. Japanese multinational corporations were praised for their growth, efficiency, and managerial discipline. It seemed like Japan would surpass the United States as the global economic leader. However, these fears turned out to be unfounded.
The downfall of “Japan Inc.” can be attributed to a faulty foundation. The country’s easy money policies and high leverage throughout the financial and corporate sectors led to a massive stock market and real estate bubble that burst in 1990. Instead of allowing creative destruction to cleanse the system and stimulate entrepreneurship and economic vitality, Japan’s leaders and policies perpetuated the crisis through repeated bailouts of failing companies.
As a result, Japan has endured three “lost decades” characterized by weak economic growth, diminished purchasing power, lower standards of living, and loss of influence in the global community. The country now faces the challenge of an aging population that strains its resources. With the world’s highest government debt-to-GDP ratio and banks that are unable to lend due to their unaddressed debt issues, Japan’s financial system is on shaky ground.
The devaluation of the yen against the U.S. dollar has had a significant impact on the Japanese people’s standard of living. Japan’s heavy reliance on imports means that the loss of purchasing power directly affects its citizens. While raising interest rates could potentially support the yen, it is not a feasible option due to political, monetary, and fiscal constraints.
Decades of easy money policies have played a central role in Japan’s economic decline. The Bank of Japan only recently began raising interest rates, following the United States and the European Union. However, even with inflation approaching 2 percent, real rates remain negative due to the short-term policy rate remaining near zero. This negatively affects Japanese households and discourages saving for the future.
Japan’s economy is stagnant, primarily due to its overwhelming debt burden. The country barely escaped a technical recession in recent quarters and has seen no meaningful growth in over 20 years, except for brief rebounds following global shocks. Additionally, Japan’s demographic situation is dire, with an aging population and a fertility rate below the minimum replacement rate for 40 years.
The warning signs from Japan should serve as a wake-up call for the United States. The U.S. government’s increasing debt-to-GDP ratio, currently the fourth highest in the world, poses a threat to economic growth. Deficit spending and reliance on borrowing crowd out private market investment and financing, hindering the economy’s potential.
Furthermore, U.S. monetary policies since the 2008 financial crisis have propped up failing businesses and inflated asset values through subsidizing capital costs below the natural rate of interest. This departure from capitalism could have consequences for the country’s financial markets and overall economy.
Another concern for the United States is its declining fertility rate. Similar to Japan, the U.S. has experienced a downward trend in fertility since 2008. Progressives argue that mass illegal immigration could help counteract demographic challenges, but this is not a sustainable solution. Instead, it places an immense burden on social infrastructure, reduces economic productivity, and imposes a heavy tax on legal citizens.
While Japan may have made mistakes along its economic journey, it has at least recognized the challenges posed by declining fertility rates and aging populations. The United States must take heed of Japan’s warning and address these issues before it faces a similar fate.
In conclusion, Japan’s economic decline serves as a cautionary tale for the United States. The country’s faulty foundation, perpetuated by repeated bailouts and failure to embrace creative destruction, has led to decades of weak economic growth, diminished purchasing power, and loss of global influence. The U.S. must learn from Japan’s mistakes and address its own challenges, including mounting debt and declining fertility rates, to avoid a similar fate. Only by taking proactive measures can the United States secure its economic future.
