Learning Japanese

So what can we learn from Japan’s experience?

If we’re not doomed to replicate the Japan experience of deflation, debt, and decline, what can we learn from their example? It’s the structure, stupid.

Japan proved that you can’t borrow and spend your way to prosperity. Already some of the US Government’s critics are saying if they had only doubled down, if they had only spent $1.6 trillion instead of the paltry $800 billion they did, our economy would be stronger now and everything would be fine, thanks. And the bond market is saying, “bring it on.”

But Japan did this for two decades. It was assumed that the country could prime the pump with domestic construction projects while support its too-big-to-fail institutions. But the economy never took off. Protected companies became globally uncompetitive and have failed to innovate and grow. Japan has now been surpassed by China as the world’s second-largest economy.

So what lessons are there for us? If we want long-term improvement in our economy and avoid a “new normal,” we need to address its structure. Complexity and set-asides in the tax code and regulation foster a permanent bureaucratic, legal, and accounting elite but do little to foster world-class competitiveness. Professional employment has been growing gangbusters, but that won’t take our economy to the next level.

Insanity is doing the same thing and expecting different results. The road to growth is through competition, not protection.

Douglas R. Tengdin, CFA
Chief Investment Officer
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