Deutsche Bank's Conflicted U.S. Outlook
Since the 2007-08 financial crisis, economists have debated whether the U.S. economy is in danger of falling into a protracted, wealth-destroying slump such as the one Japan experienced in the 1990s. The view at Deutsche Bank? Depends on who you ask.
Deutsche Bank’s Ajay Kapur says the U.S. is sliding into a torpor similar to Japan’s so-called Lost Decade. The Hong Kong-based strategist draws the parallel based on similarities in demographics and financial-market performance. Binky Chadha, head of the bank’s U.S. equity strategy team in New York, and Michael Biggs, a London-based economist, disagree. They cite variations in the nations’ growth rates and credit demands that undercut the Japan analogy.
The researchers aired their differences in a recent report, and the conflict underscores the ongoing debate over the U.S. outlook. In a quarterly Bloomberg Global Poll of 1,031 investors, analysts, and traders, 56 percent of respondents said a Japan-like scenario is “very” or “fairly” likely.
Deutsche Bank declined to make the authors available for interviews. Kapur, who joined the bank last year and has worked for Morgan Stanley and Citigroup, points to falling bond yields and volatile stock markets in both the U.S. and Japan to bolster his argument. A 63 percent plunge in Japan’s equity prices from late 1989 to August 1992 was accompanied by a collapse in land values from 1990 to 1993, producing stagnation and deflation during the 1990s and a second decade of weakness during the 2000s.
The Nikkei 225 Stock Average remains almost 80 percent below the record 38,915.87 reached on Dec. 29, 1989, and land prices have fallen in 18 of the past 20 years. Real growth averaged 1.2 percent from 1991 to 2002.
In the U.S., a housing bubble bust sent home prices down as much as a third below the high reached in April 2006. The Standard & Poor’s 500-stock index has fallen about 20 percent from the record close on Oct. 9, 2007. The yield on 10-year Treasury notes has dropped to 2.2 percent as of Oct. 26, from about 8 percent in November 1994, while the yield on the comparable Japanese bond fell to less than 1 percent, from about 4.7 percent.
Kapur also sees similar demographic trends at work. In Japan, the ranks of working-age people climbed in the 1980s as a percentage of the overall population, contributing to economic growth, budget surpluses, and a massive property boom, Kapur argues.
The U.S. saw a similar shift when its share of people aged 15 to 64 rose in the early 2000s. The ratios peaked in 1990 for Japan and 2005 for the U.S. and were followed by housing busts. Both countries are facing a declining share of workers relative to the total population for years to come, he said. “It is not often that one feels somewhat ill while writing research,” Kapur wrote in the report.
Kapur’s New York-based colleague Chadha says the comparison is “overdone,” and he doesn’t see the U.S. following Japan’s pattern. Nominal gross domestic product is now about 4 percentage points higher in the U.S. than in Japan, and deleveraging in the U.S. “has been swift and is already further ahead today than in Japan after 20 years,” he wrote. U.S. companies also are reporting a recovery in profits, Chadha added.
Biggs called the two nations “superficially similar, fundamentally different,” partly because demand for credit, which fell in Japan, still is growing in the U.S. “We agree that U.S. debt levels are high and will need to come down, but we do not believe that this deleveraging process needs to be a drag on demand growth,” Biggs wrote. “The starting point for the U.S. is so dramatically different from Japan in the 1990s that it seems unlikely to us that the U.S. should suffer a lost decade of weak demand growth.”