Lessons From Japan

The Globe and Mail has an insightful piece comparing the crisis hitting the United States and Japan’s lost decade. However, there are differences, and the main one is that in the United States’ it is the consumer that is burdened with debt, and not companies.

One other thing makes the U.S.-based crisis potentially worse than Japan’s. In Japan, it was companies that got themselves into debt in the boom years, and then had to go through the painful process of “de-leveraging,” or paying off their loans. In the United States, the problem lies more with households that borrowed too much, then saw the values of their homes plunge.

Akira Kojima, a senior fellow at the Japan Centre for Economic Research, points out that the average U.S. household has a debt equivalent to 160 per cent of its income when credit card debts are factored in. Getting out from under that burden will take years.

“Companies can de-leverage,” said Mr. Kojima. “They can fire people, they can cut salaries, they can sell assets. But with households, it’s harder.”

Simply put, households will not be able to dig themselves out of debt without major changes to their spending habits.

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