What Japan’s Crisis Could Teach The U.S. And ETFs

As we take a step back to look at our whole economic situation, many economists have watched our economy and subsequent exchange traded funds (ETFs) stagnate with a distinct sense of déjà vu.

The Lost Decade. While President Barack Obama is trying to smother our economic problem with a copious amount of money, the Japanese are watching nostalgically, knowing that they too have endured something similar, in what is known as the “lost decade,” reports Hiroko Tabuchi for The New York Times. The Japanese economic stagnation in the 1990s resulted in their banks owing overwhelming debt and successive governments wasting trillions of yen on fruitless measures.

The Nikkei chart below shows the state of Japan’s markets from 1994 to 2004.

Sound Familiar? In 2003, the government finally paved the way to recovery by spending $22 billion to nationalize a major bank, wipe out its shareholders and allowed weaker banks to fail. Tokyo’s main Nikkei stock index lost around three-quarters of its value, the public debt exceeded its GDP, and deflation was rampant during the fallout.

Students of this poignant Japanese tale say the U.S. economy is starting to follow the plot already laid out by Japan. The real estate bubble that collapsed in Japan left banks holding trillions of yen in loans that were worthless, which has a striking resemblance to the situation here.

Lessons to Be Learned. The Japanese have also tried measures the United States has already gone through: ultra-low interest rates, fiscal stimulus and unsuccessful cash injections. The lesson provided is that they should have vehemently pushed for nationalization of banks. The bank rescue will then determining the fate of the wider economy, and the stimulus plan prioritized by President Obama may prove ineffectual if the banking sector is not remedied.

What will it take to get the S&P 500 (^GSPC) out of its own “lost decade”?

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