America may be less prepared for a downturn than Japan, which endured a long slump in the 1990s. A board flashed stock prices in Tokyo in 2000.

JIM IMPOCO ESSAY

Is America the new Japan- Or more precisely, Japan circa 1990, just as it was staggering into its Lost Decade?
As recently as six months ago, the notion that the United States would face a decade or more of Japanese-style economic malaise seemed preposterous. But after the last few weeks of financial turmoil and political ineptitude, you could almost argue that America would be fortunate to end up with a downturn akin to Japan’s. That’s because in several key ways, Japan was much better equipped to withstand its financial lashing in the 1990s than Americans are today.
A little history: During the post-World War II era, the Japanese economy rose from the ruins to become the world’s second largest. By the mid-1980s, America and Japan accounted for a staggering 40 percent of the global economy. Picture Ronald Reagan and Prime Minister Yasuhiro Nakasone singing “We Are the World” in some fancy karaoke bar in the Ginza.
Then, in 1986, Japan shifted into overdrive. It was a time of super-easy credit, frenzied financial speculation and blistering industrial expansion. During the second half of the 1980s, the Tokyo Stock Exchange seemed to be on a permanent rally. Between 1986 and 1991, Japan’s economy expanded by roughly the equivalent of France’s gross domestic product, then $956 billion. Japan was also outshining the United States, whose consumers bought most of its products and whose military provided its protection. In fact, Japan’s rise seemed to coincide with America’s slide.
The United States appeared to be a spent power. Anything we could do, Japan could do better. We made Pintos; they made Accords. But mostly we made things like leveraged buyouts and they made, well, a lot of stuff - stuff the world loved.
Yet Japan was also busy manufacturing a second bubble of comical proportions. Its real estate market made our recent mania seem downright restrained by comparison. At the start of the ‘90s, a square meter of prime Ginza real estate cost as much as $300,000. Homes were so expensive in land-scarce Japan that families took out multigenerational loans.
My favorite example of how real estate had become an extreme sport: the property that housed the Imperial Palace in downtown Tokyo was believed to be worth (no one knew for sure because it wasn’t actually for sale) as much as the entire state of California.
The double bubble turned into double trouble when both burst at the same time. Denial followed denial. When officials finally admitted there was a problem, policy misstep followed misstep. Experts on Japan, watching Tokyo’s initial nonresponse to the crisis, smirked that Americans facing a similar mess would have rolled up their sleeves and gone to work. Just look at how we had handled our savings and loan debacle.
What came next for Japan was depressing, but far from a depression. There were no miso soup lines, and the relatively low official unemployment rate often seemed to belie that there was a problem at all. But Japan seemed out of miracles. The economy would grow a little, then stop, then contract a little.
The notion of Japan as a threat, along the lines that Michael Crichton described in his novel “Rising Sun,” suddenly seemed silly. No one worries much these days about Japan taking over the world. When Americans wring our hands, it’s China we fear.
Now that the United States’ second bubble has popped, some Americans worry that this is the beginning of their own Lost Decade. There is still good reason to think America’s policy response will not be - and cannot be - denial.
Still, America lacks several advantages Japan had as it grappled with the aftermath of its burst bubbles. The most obvious is that Japan began its Lost Decade as the world’s largest creditor nation, and it still is. By contrast, America is now, as it was then, the world’s largest debtor nation. Just to run the federal government, we need to borrow $2 billion a day from increasingly nervous lenders overseas, including the Japanese.
For the moment, it is in the best interest of America’s creditors to keep the spigot open, but when and if that changes, watch out. Some estimate the federal deficit at over $750 billion next year.
That’s not the biggest ever as a percentage of total economic output, but it’s up there; and it’s not clear how that number is going to get smaller any time soon. What’s more, whereas America has a negative savings rate and its citizens are neck-deep in debt, the Japanese have remained fanatical savers.
That’s why when people ask me now if we are turning Japanese, I no longer tell them: “No way!” Now I tell them: “If we are lucky.”