Can Japan happen elsewhere?- (10.05.02)

This used to be a question of repeating an industrial success story. However, although the 1997 Asian financial crisis afffected all the major Asian economies, only Japan seems to have entered a deflationary spiral as a result. The others, such as Thailand and South Korea suffered similar liquidity problems at the time but seem to have recovered.

Some of this cab be explained by industrial restructuring. The chaebols in Korea were blamed within the country for the problems at the time and reforms were started soon after. Although the long term impact of these reforms is still unclear, in Japan the industrial structure was left largely unaltered. It is seen more as a problem with the financial institutions rather than the economy as a whole.

Paul Krugman described this situation as "a growth recession" where an economy continues to grow but capacity increases faster. This emphasis on capital rather than consumption causes a liquidity trap and hence deflation.

The question for the rest of Asia is whether they have avoided the same trap as Japan or just postponed it. There are fears in Thailand in particular that lowering interest rates to avoid the impact of a world recession may produce a Japanese style depression.

Whilst this is possible, the other economies in Asia are very different from Japan. They contain more dynamic elements to support consumption than Japan's more mature economy. However, without real industrial restructuring there remains a risk that deflation will just be postponed rather than prevented.

Some economists in the US are also expecting a larger recession to come, based on what happened in Japan in the early 90's. This is partly the reverse argument to above in that artificially boosting consumer spending gives a false impression of the economy when in reality a 2 to 3 year recession is due. Problems of the like of Enron are seen as evidence of a corporate bubble of artificially supported profits that needs to burst. This also seems too pessimistic, although is a possible scenario. Enron is not a typical company to represent corporate America and is not sufficient to suggest the US will follow the Japanese experience. The fact that Enron collapses and the US economy continues without much pain shows the difference with Japan where the likes of Enron would never be allowed to collapse and would probably continue indefinitely.