Comment 75: What is “Japan Syndrome”? Why does it matter? (June 17, 2010)

“Japan Syndrome” is the name to describe a set of economic conditions observable explicitly. Those conditions are so named because they have been vividly displayed in Japan since its adoption of near-zero interest rate policy in the middle of 1995. The underlying reasons that have led to “Japan Syndrome” may vary from country to country, but once one falls into “Japan Syndrome”, it is very difficult to climb out. Recently there are indications that the economy of The United States may be heading toward “Japan Syndrome”. That is why we clarify what exactly “Japan Syndrome” is, and how to gauge its approach in this comment.

Let us first list the typical symptoms of “Japan Syndrome”:

1. Short-term interest rates are held near-zero by the central bank.
2. The central bank injects a very large amount of liquidity into the financial market, but commercial banks are reluctant to lend to consumers and small businesses so that those injected liquidity are merely kept with the central bank as reserves, or are parked in the ultra safe debt instruments.
3. The yield of long-term government debts becomes very low, only slightly above the near-zero short-term interest rates.
4. Consumers do not open their wallets since they cannot accumulate enough for their retirement life under the environment of near-zero ubterest rates, or they are not able to borrow money from the banks for consumption.
5. Inflation ranges from very timid to slightly deflationary.
6. Economic growth rate is erratic but much more subdued than used to be. Whatever growth left is due to government stimuli and exports, but not from the domestic consumption.

Looking at the economic conditions of The United States, symptoms 1, 2 and 5 have manifested themselves already. The recent rapid decline of the yield of 10-year T. Note may cause symptom 3 to be satisfied soon. The slowdown of consumer spending, if continues, will lead to symptom 4. Symptom 6 will be matched if GDP growth rate falls to around 2% a year. When all six symptoms manifeste themselves,then we must conclude that “Japan Syndrome” has engulfed The United States, too. As has been pointed out in article 14, if banks continue to refrain from irresponsible consumer loans, either from their own design or mandated by the new financial regulation reform, “Japan Syndrome” will be inevitable.