Japan had a major problem with falling real
estate prices in the 1990s with land values dropping
by 70 percent until 2001. While we have seen a significant correction in real estate prices in the United
States (average prices were down over 17 percent
from September 2007 to September 2008) and we
may see more of this before home prices stabilize, the
other dynamic that we have seen is a tightening of
mortgage loan requirements and markets. This credit
tightening has worked to discourage not only weak
loan candidates but also many good loan candidates.
To add insult to injury, points on the loans are now
being charged to borrowers who do not have exceptional credit scores.
From an economic standpoint, demand has declined in spite of an increasing supply of homes—the
“perfect storm” for the real estate market.
Let’s now compare the two countries’ demographics. Japan has an aging workforce and an aging
population. The Japanese labor force is estimated to
decline by 10 million people between now and 2030.3
The United States, by comparison, has an annual
population growth rate of just less than 1 percent
and a significant portion of the population—one in
four—is under 18. In the United States, demand for
consumer goods will not decline due to demographics, while in Japan the demographics could lead to a
lowering of consumer demand over time.
Conclusions
While there are deflationary pressures at work today,
such as plummeting oil and real estate prices, whether we will see the overall cost of living decrease and
inflation grow at negative rate in 2009 and 2010
remains to be seen.
Much will depend on consumer confidence and
expectations, which continue to be shaped by the
mass media and a barrage of financial and economic
information. Job losses, if greater than anticipated,
will lead to a high possibility of deflation by the latter part of 2009.
One could plausibly argue that we are approaching a liquidity trap in the United States, but with the
subprime mortgage debacle, it could be argued that
rather than sitting on money and creating a liquidity
trap in the classic sense, consumers could create the
same trap by having to pay off large mortgage and
credit card debt with any excess cash they hold.
In other words, it is important to note that
while the Japanese save a much higher percentage of
their disposable income, the American savings rate
and culture are so very different that households
in the United States could contribute to creating a
liquidity trap by having to pay off large amounts
of debt. Consumers will not spend discretionary
income, which a significant number do not have due
to higher mortgage payments on subprime loans as
well as credit card debt.
Let us hope that the actions taken by policy
makers will allow us to overcome the structural
economic problems we have encountered in 2008
so that we may avoid any prolonged deflation or a
liquidity trap in 2009.
Endnotes
1
Kosuki Takahashi, “Japan Returns to a Deflationary Brink,” Asia Times,
December 2, 2008.
2
Michael Moore and Liz Cappo McCormick, “Treasury Sells Three Month
Bills at the Lowest Rate Since 1929,” www.Bloomberg.com, December 8,
2008.
3
Kosuki Takahashi, “Japan Returns to a Deflationary Brink,” Asia Times,
December 2, 2008.
Have a question or
comment? Please use
the reply form
provided in this issue
or leave a message at
(202) 663-5075.
Thomas W. Bright, CTFA, is a vice president
and trust officer with Community Financial Services Group based in Newport, Vt. In addition to
his certified trust and financial advisor (CTFA)
designation with the Institute of Certified Bank-
ers, Mr. Bright holds an M.B.A. in international
business from the Thunderbird School of Global
Management. He also serves on the ABA Trust &
Investments editorial advisory board. Reach him
by e-mail at tbright@cfsgtrust.com.
