Guest Post: Is America Today In Worse Shape Than Japan During Its Lost Decade?

Washington’s Blog

As I noted last year:

Our savings is … dramatically lower than Japan’s when that country entered into its Lost Decade. So the Japanese were much better prepared than we are.

(I also noted that we’re in worse shape than America was going into the Great Depression … but that’s another story).

Now, BIS – the central banks’ central bank – agrees that Americans are in worse shape than the Japanese.

Specifically, a new BIS paper written by Shinobu Nakagawa (Director, Head of Investment and Market Research, International Department, Bank of Japan) and Yosuke Yasui (International Department, Bank of Japan) concludes that Japan was better able to weather the Lost Decade than the U.S. is able to weather our current economic woes, given three differences between the two cultures:

This paper aims to show the difference in vulnerability to financial shocks between Japan’s household sector and its banking sector and between the Japanese and US household sectors.


The average Japanese household has a financial balance sheet that is far more conservative than that of the representative household in other industrialised countries: in the case of Japan, cash and deposits represent half of total financial assets…. In contrast, the ratio for US households is only 16%, while Europeans hold about one fourth to one third of financial assets in these safe and liquid products.


Japanese households did not rely much on mortgage funding in the bubble period around 1990 …. The representative Japanese household accumulated the large down payment required for purchasing a home on credit and, unlike many homeowners in the United States, did not subsequently extract equity from the house through additional bank loans.


The conservative approach to debt taken by Japanese households mitigated the effects of the decade-long economic slump. Indeed, household bankruptcies were not widely recorded in that period because the quantity of safe and liquid buffer assets, such as bank deposits and postal savings, was always greater than debt on the average household balance sheet.


Credit risks are eventually concentrated in the Japanese banking system, which has
not changed fundamentally in decades.

Securitisation markets are, in contrast, well developed in the United Kingdom and the United States. UK and US banks are eager to transfer credit risks to a variety of investors in the financial system, including life insurers, pension funds and hedge funds…. Particularly for the markets in which off-balance sheet securitisation has deeply penetrated the credit markets – once credit, liquidity or other shocks occur, they could trigger the onset of risk contagion across a wide range of economic agents, including households.


The difference between the highest and lowest income groups [in the U.S.] is far greater than in Japan…. Net worth is much more evenly distributed in Japan [than in the U.S.]


The differences we found can be summarised as follows:

(1) Household leverage, relative to both safe and liquid assets and to GDP, is smaller in Japan than in other industrialised countries, and was so even during Japan’s bubble period.

(2) The finances of Japanese households were not severely damaged by the mid-1990s
bursting of the bubble. Banks, however, with their large accumulation of household
deposits on the liability side of their balance sheets, were a victim of their large
holdings of defaulted corporate loans and the resulting capital deterioration during
the bust; in response, banks tightened credit significantly during this period.

(3) Household net worth in Japan is not highly concentrated. Thus, regardless of income level, Japanese households are in general resilient to shocks thanks to a sizeable buffer of assets and moderate leverage. The situation is quite different in the United States, where the distribution of net worth among households is highly skewed in favour of the highest-income cohorts. With only a thin buffer of assets, low-income families in the United States – the subprime cohorts – could be vulnerable to market shocks.

On the other hand, U.S. age demographics aren’t quite as horrible as Japan’s.

As I noted last year:

The following chart shows that Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:

Chart 2: Old Age Dependency Ratios for Selected Countries



The chief economist for Standard and Poor’s is now confirming the importance of national demographics:

But I don’t think [a lost decade in the U.S. is] as likely over here. For one thing, one of the problems in Japan was the demographics. And we don’t have the problem of a declining population to deal with, although the labor force is going to slow down considerably as soon as the baby boomers retire.

Similarly, CNN Money reported last month:

Some economists think there is a very important difference between Japan and the United States that can’t be overlooked. And it could keep the U.S. from plunging into a long-term deflationary spiral. Demographics.Simply put, the United States is not faced with as big of a percentage of people getting older and retiring as was the case in Japan during its Lost Decade.

According to research from Brockhouse Cooper, a brokerage firm based in Montreal, the percentage of people aged 65 or older nearly doubled in Japan between 1990 and 2008. Meanwhile, that percentage has stayed roughly the same in the U.S.

So even though there are a lot more people in the U.S. that are retiring as the Baby Boomer generation gets older, total population growth is rising due to high fertility rates and increased immigration. That’s key since younger consumers tend to spend more.

“Demographics are the main difference between Japan and the United States. Aging in Japan was a huge issue that led to stagnation,” said Alex Bellefleur, a financial economist with Brockhouse Cooper. “Senior citizens tend to have consumption patterns that are a lot different than their younger counterparts. They’re not buying as many homes, cars and other durable goods.”

There’s also the issue of what governments have to do in order to support their aging populations. With a greater percentage of older retirees, that puts a bigger strain on fiscal budgets, which could contribute to deflationary pressure and economic sluggishness.

Along those lines, Japan currently has only 2.9 workers supporting retirees, said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm. By way of comparison, there are 5 workers for each retired person in the United States.

For that reason, Higgins said it is an “overly simplistic generalization” to suggest that the United States is destined for its own Lost Decade just because the U.S. and Japan both experienced a nasty downturn following an asset bubble.

Simply put, the strain on the U.S. government by an aging population shouldn’t be as severe as it was in Japan.

Indeed, as the following chart from Japan’s Ministry of Internal Affairs clearly shows, the aging of Japan’s population from 1990 onward has far outstripped the projected aging of the American population (trace Japan from 1990 onward with your finger; then do the same for the U.S. starting in 2010):

Figure 2.4 Proportion of Elderly Population by Country (Aged 65 years and over)

(America’s demographics are still horrible compared to those of countries like India, but still better than Japan’s).

Moreover, as I’ve previously pointed out, the peak spending years are younger in Japan than in the U.S.:

The peak Japanese spending range has been estimated to be comprised of 39-43 year olds. The more 39-43 year olds Japan has at any given time, the more consumer spending there will be, as these are the folks who are the big spenders in Japan. Dent argues that the Japanese economy will tend to grow when the number of 39-43 year olds grows, and to shrink when it shrinks.

In the U.S., Dent says, 46-50 year olds are the biggest spenders, because that is when – on average – they are paying for their kids’ college, paying mortgage on the biggest house they will own during their life, and making other big-ticket purchases.

In other words, aging hurts Japan more than it hurts the U.S., because the peak earning years are 7 years younger in Japan than in the U.S.

Of course, if unemployment doesn’t decline, this point may be moot … unemployed 46-50 year olds are not going to be peak earners.

Hat tip Tyler Durden.

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George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. Diego Méndez

    Very interesting post.

    I think explaining economic differences through culture is ill-fated. The Japanese economic model (as the European one) is fundamentally different from the US one. There’s more financing through banks, less financing through stock exchanges, more wealth redistribution, lower immigration and lower entrepreneurship.

    I don’t think it all boils down to culture. Those differences are economic and due to different economic models. The US economic model is probably better suited for a less cohesive nation, a nation of so many different social groups and so heavy immigration that it lacks the uniformity and cohesiveness of a single nation-state.

    Japan is on the other end of the spectrum, with Europe laying in between. But more than culture, I’d blame different economic/social structures.

    Regarding demographics, projections are difficult to believe. In the last decade, US population growth has been driven by two factors: immigration (from crisis Mexico to a US booming economy) and immigrants’ children. Time and recessions (or renewed growth in one demographically stable Mexico) would change dramatically demographic patterns.

    On the other hand, US aging has been prevented by an inefficient and unfair health system, whose best success has been making US people’s lives 4 years shorter than Japanese ones. Hardly something to be proud of.

  2. Thomas Williams

    re: Japan’s Lost decade

    Getting a bit tired of the old canard that an aging population is a bad demographic.

    That is only true if one believes the earth’s population can grow eternally, perpetuating a retirement ponzi scheme forever.

    Japan’s savings will assure that guest workers can be hired to care for their aged without exploding the population.

    The USA has committed suicide with its open borders policy for all immigrants, legal and otherwise. That guarantees an ever increasing competition for declining resources and a decline / collapse of living standards for all.

    Thanks for your attention

  3. jpm

    The japaneese lost decade is 30 years old now. As for ageing population in the USA they would have been a huge value to the economy had Wall Street and the bankers not stole all their money.

    As for all the illegals in our country which is about 20 million plus the 12 million we gave amnesty to 20 years ago they have taken the jobs of the 30 million un and under employed americans who can’t find jobs with a livable wage. If your not willing to forego single family housing, health insurance,car insurance and the concept of working under the table without taxation and the old normal benifits then Corporate America does not want to hire you.

    As long as Politicians, Bankersters and the Wall Street Theives continue to pull down the huge wages and Bonus and benifit packages middle class Americans will continue to suffer. We have to make them hurt to get them to change their ways.

    1. Psychoanalystus

      My friend, in recent years many of the immigrants who, as you say, took away jobs from currently unemployed Americans, have returned to their countries. This is true of millions of people from European nations such as Poland, Greece, Cyprus, Romania, Hungary, and Russia. Furthermore, many Chinese and Indians have long since returned to their native lands. I have met many such people. More often than not, these are highly educated individuals without whom it is very difficult to imagine Microsoft or Silicon Valley remaining competitive.

      Just last month I spoke with a guy from Romania who has worked for 15 years at Microsoft in Seattle, and now works for Microsoft in Romania. His salary is the same as it was in Seattle, but his cost of living is now one quarter of what it was in the US, allowing him to save lots and lots of cash. In addition, in Romania he enjoys the clear benefits of socialized medicine, a good and free education system, and safety from the violence and drug epidemic that characterizes most American communities. He is also a US citizen, and his children were all born in the US. Yet, he prefers to raise his children in Romania.

      Using my own example, I was born and was educated in the US, but anticipating the current decline of this country, have already established part-time residence in Greece, have obtained EU citizenship, and have a second home in Greece. I have absolutely no interest in raising my daughter in the US. And, by the way, I too am well educated (both, my wife and I are doctors), with very good earning potential in this country (US). Yet, we would rather earn 75% less in Europe but live in a nice, safe society, and not be part of a corrupt and just plain evil medical system such as the one in America.

      My friend, it is time to stop blaming the current state of American society and economy on immigrants, and start demanding real change from Washington and at state and local levels. Failing that, and continuing to look for pseudo-solutions such as the Tea Party only accelerates this nation’s entry into the Third World.


  4. Anonymous Jones

    Well, there are some differences that might make it worse. Then again, there are some differences that might make it better. Of course, there are some similarities that might it make it exactly the same. And with all that, some will be better off if we’re mostly worse off, and well, some will be worse off if we’re mostly better off. What was I talking about it again?

  5. jim

    The idea that money in the bank should only be worth near zero interest rates on a lifetime of savings is a criminal act sanctioned by our Government against its people for the sake of bailing out the Banksters and the Theives of Wall Street who continue to pull down billions in bonus money and perks. That is a form of taxation and theivary that destroys any hope of ever bringing back a sense of honesty or integrity in how we do business.

    A true slap in the face for anyone who still tries to do finance in a honest way.

  6. Ed

    The aging population thing also seemed to me like a canard.

    If the problem, in the U.S., was a particular demographic bulge (the baby boom) eventually producing too many old people for the economy and society to handle, then we are talking about a one off thing. This is the worst case scenario, it wouldn’t be fun to deal with, but is essentially self-correcting, plus not applicable to Japan.

    If the problem is people living longer, well past the time when they traditionally stopped working, then if people are older and healthier longer you can extend their working lives. If it turns out the workforce can’t absorb the additional older people, and has to force them into retirement earlier, then that is an employment problem not a demographic problem. It it turns out that people are living longer but are getting too frail to work at the same age as earlier (in other words, modern medicine has just extended senescence), then what you have is a medical problem.

    There are also the options of importing younger people if you really have too, or just providing for the increased costs for the elderly from the increased economic growth. Of course the economy may not be growing, but again this is a separate problem.

    In other words, the “aging population” thing seems either to be a non-problem, or only a problem due to some very serious, but completely different, problems. And if the latter is the case, it should play out very differently in Japan than in the United States.

  7. derek

    People getting old is a good thing. The alternative is people not getting old.

    Age pyramids are a bad thing, except in those historically-rare periods when humans are expanding into an empty (or recently emptied) land. Age pyramids tell you either that children and young adults are dying off young, or that the population is skyrocketing, which has to stop eventually.

    Age pyramids are literally a pyramid scheme, and it’s not good to be at the bottom of the pyramid when the bubble pops. Better to plan for an “age column”, with young people in a minority, and a constant population of vigorous young adults, middle-aged, and old-aged people.

  8. ang

    I also fail to see what the aging population has to do with the economic troubles in Japan. It seems to me the main problem is lack of demand (aka tight money). If anything, retiring workers should boost demand relative to supply.

  9. Psychoanalystus

    First, Japanese debt was generally owed to Japanese banks, not to foreign countries, as is the case with the US.

    Second, the Japanese did not decimate their own industrial base just to enrich a few greedy and corrupt Wall Street bansters. Japan remains an industrial superpower, while the US is now a de-industrialized nation.

    Third, Japan does not have a parasitical military-industrial complex sucking the lifeblood out of its economy.

    Fourth, Japan has a wonderful medical system providing equal access to all citizens, and a world-class education system. The US has a third world medical system, and a failed education system, both providing brutally discriminatory access and miserable quality of product and service. As far as its medical system goes, the US is a third world nation, and the Obamacare that just passed is a shameful betrayal of the American people at the hand of this Trojan Horse, Wall Street-sold-out president.

    Fifth, Japanese culture is stable, based on respect, honor, and dignity. American culture is based on greed, selfishness, ruthless individualism, and reckless disregard for the human being next to you.

    Sixth, Japan is a safe society, while American society is largely dependent on drugs, gangs, prisons, violence, and just plain and simple abuse of others and self.

    I can go on, but I better stop before we all get too depressed.

    Reality check: if Japan lost a decade, America is about to lose an entire millennium.


  10. Richard

    Two examples of how far we’ve fallen as a nation (or how much the economy has been hijacked by the corporate/bankster oligarchy):

    1- Vietnam, a country we tried to bomb and Agent Orange back into the stone age 40 years ago is building a 50 billion dollar high speed rail system to link its major population centers. In the US building a comparable transportation system is considered far beyond our means.

    Or reflect upon this account of health care costs in Guatemala, a country in which we financed death squads in the name of anti-communism for decades.

    2-September 20, 2010 – Latitude 38 Magazine
    Once you leave the United States, health care costs plummet. Secondly, in places like Mexico, there are very low cost health insurance options. Terry needed to have emergency laparoscopic surgery to remove her gall bladder while they were spending the summer up the Rio Dulce. Here’s her concise report:

    “The total cost was $5,000 U.S. That included three nights and four days in the upscale and modern university hospital in Guatemala City. This cost included the surgeon, anesthesiologist, and primary care doctor fees, as well as all tests, medications, and follow-up care. It was one of my best hospital experiences, and I’ve had six other surgeries, all of them in the United States.”

    To add a little perspective on the situation, a Sausalito sailor we know had the same surgery a couple years ago at Marin General. The total amount billed to the insurance company? $80,000! And that didn’t include any overnight stays — he was forced to check out six hours after the surgery.

    I wonder if Japan’s economy is even a valid standard of comparison. After all it is a functioning society rather than a third world oligarchy.

    1. Psychoanalystus

      I absolutely agree with your assessment of the US healthcare system. It is a miserable, criminal, and evil state of affairs. Costs are completely insane, and quality is shabby. Furthermore, medical education in the US is inferior to that of most other nations (e.g., 4 years in the US versus 6 years everywhere else).

      I expect more and more Americans will seek medical treatment abroad, and in fact medical and dental “tourism” is already a booming multi-billion dollar a year business.


  11. bluffraise

    Gota love the tabloids take on the end of the great recession.

    Official economy-watchers announced yesterday that our worst recession since the Great Depression quietly ended when we weren’t looking — back in June 2009.

    While it’s hard to swallow for those who stand in longer jobless lines and for others who see paychecks shrinking, a panel of top economists at the National Bureau of Economic Research concluded that we hit a formal bottom — and end — to the economic dip 15 months ago.

    Oh, really?

    While the nonpartisan, not-for-profit NBER’s seven-member committee determined the economic beatdown ended last summer, many millions of Americans are still feeling the pain.

    A panel of renowned economists, chaired by Robert Hall (front) of Stanford University, contend the recession ended in June 2009 — despite the nearstagnant state of the economy which suggests otherwise.
    And the panel said the concept of a “double-dip recession” doesn’t exist in its deliberations, and that any new recession would start on a new clock.

    The unemployment rate has ticked up to 9.6 percent from 9.5 percent in June 2009, and real income, which had ticked up 1.4 percent in June 2009, has more recently fallen 1 percent. Housing prices have not seen any appreciable gains, and with 12 million homes in a shadow inventory not yet on the market, prices could stay depressed for three more years, experts have said.

    “Every single one of the individuals who wrote the report needs a serious reality check,” Queens resident Bob Johnson told the AP. The 46-year-old had worked in communications and has been looking for a job for more than three years.

    More than 8 million Americans lost their job in the recession, which began in December 2007. The snail-paced recovery is barely creating 80,000 new jobs a month — a pace that will take 100 months, or more than 8 years, to regain all those lost jobs.

    In fact, the US economic growth this year is forecast by the Organization for Economic Cooperation and Development at 2.6 percent. It would take twice that rate to drive down the jobless rate by a single percentage point.

    The blue-ribbon committee has been the formal arbiter of US recessions for nearly a half-century.

    Some pundits call the panel “NBER-right,” since its picks on the ends of the last several recessions didn’t coincide at all with the stubborn reality.

    Indeed, the committee acknowledged that the real dates of a recession don’t always match the theoretical beginnings and endings that the panel picks.

    “The committee does not make real-time judgments, but waits for the availability of all relevant data and for the completion of early data revisions. The committee then looks back on history. . .” it said in a statement.

    The seven economists on the panel hail from think tanks and schools such as Harvard, Princeton and Stanford, and picked their bottom on a variety of data. They couldn’t decide however, on the actual date in June the recession died. An eighth panel member took a leave and didn’t get involved in the report, NBER said.

  12. Alex

    The biggest factors are not even mentioned in this article – you guys need to get your heads out of the ECON 101 text books.

    You mention demographics but, of course, ignore the most important part of it: race. Japan is monoracial. That alone is a benefit but they are also a moral and responsible race so it is even better. Some African country can be monoracial They don’t get very far but they are still better off than when there are several groups tearing the country apart. Factor out the crime committed and the costs associated with non-Whites in the US and you have a nation with the highest quality of life on Earth. WITH that factored in, we fall behind other examples of even poorer nations, like certain Scandinavian ones, that don’t have to suffer “diversity” like we do. Imagine being able to live in a city close to your job. The cost of just that alone (the added traffic and time and gas, etc…) is an ENORMOUS toll.

    Secondly, Japan rose to power with manufacturing and didn’t abandon it like we did.

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