As is typical of recoveries from recessions that result from the bursting of big credit-fuelled asset price bubbles, the recovery in the US from the 2008-09 recession and associated financial crisis is very weak and fragile. A full two years after the National Bureau of Economic Research called the end of the recession, the level of gross domestic product is still just below its pre-crisis peak (reached at the end of 2007); the Federal Reserve is still operating deeply unconventional monetary policy; and 10-year Treasury yields are hovering around the remarkably low level of 2 per cent. Many investors are asking if the US is “going the way of Japan” in the 1990s, an economy that is often said to have “l(fā)ost not one but two decades.” I think not.

It is important to be clear about what “turning into Japan” means. The US is like Japan in that both economies experienced big asset price and credit bubbles and their bursting left an overhang of debt on private sector balance sheets. The US is like Japan in that the debt deleveraging that occurs, once such a credit-fuelled asset price bubble has burst, makes monetary policy less effective and keeps growth muted for a long time. The US is also like Japan in that, in such circumstances, government deficits rise and government debt starts to pile up, as tax revenues fall or stagnate and government spending and transfer payments rise.

But what marks Japan out since the bursting of its asset price bubble in 1990 is not these similarities to the US today. Rather it is that, as a result of a series of policy errors, the economy slipped into deflation and has stayed there ever since. The most general measure of the level of prices, the GDP deflator, peaked in Japan in the second quarter of 1994 and has fallen a cumulative 17 per cent since then (in the same period the US deflator is up 42 per cent). Partly as result of such entrenched deflation, and the associated waning of risk appetite, nominal GDP in Japan is at its lowest level since the first quarter of 1991.