Comparing bubbles and deflation in the US and Japan

- Concerns of deflation in US — "Concern has arisen that the US could see a repeat of what has happened in Japan: namely, a prolonged period of economic sluggishness and falling inflation. However, the US bubble was far smaller than Japan's, so the post-bubble damage should be smaller as well. Moreover, we think the US government responded more appropriately than did the Japanese government."
- US housing bubble was small — "In Japan, residential property prices rose 88.0% in the five years to 1991. In the US, housing prices rose just 47.1% in the five years to 2006. Accordingly, the after-effects were smaller in the US as well."
- Japan-specific structural problems run deep — "There are two overlapping reasons for slow economic growth over the long term in Japan: 1) serious damage from the bubble bursting and 2) a decline in latent growth potential for the Japanese economy. The impact of the latter has been larger since the NPL problem was resolved in 2004."
- Deflation in US unlikely — "The US is not the only economy to see a longterm decline in deflation—it shares this with the rest of the world. USspecific cyclical factors have pushed down inflation in the short term. US economic growth potential is higher than that for Japan, so long-term deflation looks unlikely."
- Reasons for long-term yen appreciation — "After hitting ¥147/$ in July 1998, the yen rose to ¥85/$ in November 2009. This was due largely to a shrinking of the gap in long-term interest rates between the US and Japan. In the US, nominal GDP growth and long-term interest rates are in a long-term downtrend."
- Global equities should continue to rise — "The PER for the S&P Global Index has fallen to about 9x based on FY2011 forecasts, suggesting that concerns are more or less priced in; this is also clear from the rapid decline in US long-term interest rates. We expect a rebound for Japanese equities from this autumn."


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