BIS' Report On The Irreconcilable Differences Between The US And Japanese Household

The compare and contrast between Japan and the rest of the developed world is a topic that will only get more and more attention as increasingly more pundits debate America's plunge into a deflationary spiral (sorry, with $2.1 trillion in shadow debt evaporating YTD, it is inevitable. It is the economy's reaction to the Fed's response, i.e., the nuclear option, at that point that is the topic of most contention - whether it will rekindle hyperinflation or have no impact on the deflationary collapse into a Keynesian black hole). The latest to chime in, interestingly, is the all important Bank of International Settlements, recently best known for promoting the regulatory farce that is Basel III. A just released paper by Shinobu Nakagawa and Yosuke Yasui looks at the nuances of Japanese household debt, and how its build up, concentration and composition is uniquely Japanese, and why Japan, unlike the US, has traditionally had the capacity of falling back on its domestic population to bid up its sovereign bonds (which is all in flux currently, as the Japanese savings rate is plunging, as the demographic shift so well covered in the past by Dylan Grice is currently taking place). Here are the findings of the BIS economists, which may provide some insight on how America's upcoming fight with deflation could proceed. Of particular note is just how skewed US society (based on GINI scores and the distribution of net worth) is compared to Japan. It also explains why America is now a democracy only on paper, while in fact it merely caters to the interests of the top 1% of the population.

Going straight to the paper's conclusions:

(1) Household leverage, relative to both safe and liquid assets and to GDP, is smaller in Japan than in other industrialised countries, and was so even during Japan’s bubble period.

(2) The finances of Japanese households were not severely damaged by the mid-1990s bursting of the bubble. Banks, however, with their large accumulation of household deposits on the liability side of their balance sheets, were a victim of their large holdings of defaulted corporate loans and the resulting capital deterioration during the bust; in response, banks tightened credit significantly during this period.

(3) Household net worth in Japan is not highly concentrated. Thus, regardless of income level, Japanese households are in general resilient to shocks thanks to a sizeable buffer of assets and moderate leverage. The situation is quite different in the United States, where the distribution of net worth among households is highly skewed in favour of the highest-income cohorts. With only a thin buffer of assets, low-income families in the United States – the subprime cohorts – could be vulnerable to market shocks.

Seeing a theme here? For all intents and purposes, Japan, even during its two-decade long deflationary process is far better equipped to handle the economic collapse that is unravelling for an entire generation of Japanese consumers. Which is why the Fed is now actively pumping $5 billion in the market every other day to stimulate inflation, and the stock market, as this is now the Keynesian system's Maginot line. The Fed can not allow mass perception of the the double dip to become entrneched as that would be the proverbial game over. What has worked in Japan for 20 years will fail miserably when applied in the US, simply because US consumers are in a far, far worse shape than their Japanese counterparts. This is further exacerbated by the massive difference in net worth distribution: Japanese society is far more homogeneous, and thus far better represented, than the US, which is extremely skewed toward high wage earners, and their specific interests (think Wall Street). If that means a POMO every day, every hour, every minute, so it shall be done. This is Bernanke's last attempt to reflate the economy by traditional means before he uses the nuclear option. Which he will have to do shortly anyway.

Here are the relevant charts from the presentation:

And the kicker: