Japanese and U.S. Market Declines: Is U.S. Economic Malaise Next?
William E. Whitesell, Franklin & Marshall College
1. Objectives
My paper will examine the collapse of stock market share values and subsequent period of extremely slow economic growth in Japan to determine whether or not there are possible parallels the U. S. might anticipate. The period of slow growth in Japan has extended over more than a decade, and it is not at all clear that the end of slow or no growth is near.
I intend to draw from the Japanese experience appropriate cautions for U. S. monetary authorities as they manage current economic conditions. Since by the time the paper is given we shall know more about monetary responses to current conditions in the U.S., it should be possible to compare Federal Reserve activities to the specific actions taken by monetary authorities in Japan.
2. Background
Developing the background involves at least some recounting of the difficulties that led to the collapse of share prices in Japan and subsequent actions by Japanese monetary authorities. It is clear in retrospect that the Japanese monetary authorities maintained tight money far too long as the economy began its decline and subsequently failed to regain a robust rate of growth. I shall give some history of the relative increases of share prices and the subsequent sharp declines and then draw parallels between what occurred in Japan and what has happened in the United States. The Japanese experience provides a number of cautions for U.S. monetary authorities who undoubtedly do not want to see the Japanese experience of very slow economic growth repeated in the United States.
3. Data and Methods
The data and methods to be employed are rather straightforward, presentation of market data and rates of economic growth along with a recounting of actions by the monetary authorities in the two countries.
4. Results/Expected Results
The results expected are somewhat transparent. The recounting of events will show parallels and disparities between the two events and the responses by monetary authorities in each county. I shall draw appropriate comparisons and contrasts between the two. The U. S. economy is obviously the largest in the world, and the Japanese economy is the second largest. I believe conference participants will find interesting comparisons and contrasts between the ways the two nations dealt with substantial market declines (with the resultant loss in wealth in each country) and the attendant changes that occurred in the real sectors of the economy in each case.
5. Discussion
A difficulty one finds with the activities of the Japanese central bank is its insistence on maintaining a tight monetary policy long after most observers would have opted for greater easing in order to stimulate economic growth. This was paired with what in retrospect appears to have been a policy that was much too easy for far too long. Most observers of the Japanese economy concluded that stock market prices were far beyond what could reasonably be supported by either current or prospective earnings. Land values were also involved. Both were tied intimately to bank loans and the money supply and to a lack of diligence on the part of the monetary authorities. The bubble inevitably burst, and recession and years of slow growth followed. The performance of the Japanese monetary authorities and subsequent performance of the general economy is used in the paper as the basis for some suggestions about what appropriate monetary policy might be for the U.S. in the developing circumstances.