ineptitude imbue: Japan's Economic Woes Offer Lessons To U.S.

Japan's Economic Woes Offer Lessons To U.S.

Japan's economy has been struggling for two decades, and faces some of the same problems the U.S. has. Here, a man in Tokyo passes an electronic board displaying falling global markets.

In the 1980s, Japan appeared to be a world beater the China of its day. Japanese companies were on a tear, buying up firms in the U.S. and property around the world.

But these days, Japan is considered a cautionary tale for post-industrial economies around the world. The country is facing its fourth recession in what are commonly known as the "lost decades."

Japan's story resonates this holiday season as American politicians try to reach a debt deal.

"I really hope the U.S. is not getting into a Japanese situation," says Hiromichi Shirakawa, chief economist for Credit Suisse in Japan.

Shirakawa says a rapidly aging society, rising public spending and political paralysis have contributed to years of stagnation in Japan and that Americans should pay attention.

"If you look at some economic indicators, they're very, very similar," he says. "My concern is the U.S. economy may not will may follow the Japanese economy's path."

Over the years, the economies of Japan and the U.S. have faced some similar problems, albeit at different times and to different degrees.

Both had real estate bubbles that burst and banking systems that racked up tons of bad loans. Both Japan and the U.S. also have ultimately unsustainable public debts. Shirakawa says Japan's economic problems are about 10 years ahead of America's.

"The American people should learn from Japan that the economy could be like Japan without the political will to change the economic system," he says.

A Rapidly Aging Society

Robert Feldman, chief economist for Morgan Stanley MUFG Securities in Tokyo, says one big problem is Japan is rapidly aging, driving up health care and pensions costs. But the country's electoral system favors the elderly, so most politicians are afraid to slash services.

"It means they can't cut medical benefits, even though they are overgenerous," he says. "There's only a 10 percent copayment for older people when they go to the doctor, and they pay no insurance premiums."

So, Japan continues to shovel money toward older people running up the national debt instead of investing for the future.

Japan borrows money to fund current consumption. That does not help improve productivity, which is crucial to economic growth. Feldman says the problem in Japan, as in the U.S., is fundamentally political.

"There is an inherent myopia in the way democracies make decisions," he says. "Unless we can redesign our democratic institutions to think about the future a little bit more than we do now, then the sustainability of our living standards is called into question."

Some Key Differences

Of course, analogies only go so far and the U.S. has avoided some of the traps that have ensnared Japan.

For instance, the U.S. Federal Reserve has flooded the American economy with money, which prevented the potential price deflation that has plagued Japan.

And Naohiro Yashiro, who teaches economics at International Christian University in Tokyo, says that U.S. politicians are trying to force themselves to confront the debt.

"Japanese also need a device like the 'fiscal cliff,' " he says. "We don't have such schemes. So actually that is us who wants to follow the example of the United States."

Feldman says voters in both countries have to look past their short-term interests and think about the long-term health of their economies.

As an example and perhaps a metaphor he points to Japan's annual health exam, which includes body measurements. Among other things, the doctor measures your waist and let's you know if it's too big. Then, it's up to the patient to address the problem.

Feldman, a trim 59-year-old, went in for his exam last year.

"Fortunately, I was just under the limits," he says. "They are pretty tough limits here in Japan. I was quite proud of myself."

Feldman recalled the doctor said to him: "Hmm. Not bad for an American."