Eye-opening piece from Washington’s Blog…
Tuesday, September 21, 2010
Is America Today In Worse Shape Than Japan During Its Lost Decade?
As I noted last year:
(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.]
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