US Risks Japan-Style Recession

America again ranked as the world’s most competitive economy in an annual survey by the Institute for Management Development (IMD), but risks being toppled by Singapore and Hong Kong.

The US situation mirrors Japan’s position twenty years ago, just before it slid into a decade of recession. In 1989, Japan’s competitiveness was unassailable, with a strong advantage in dynamism, industrial efficiency and innovation. Then all hell broke loose: the stock market crashed, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, followed by large banks crisis in 1997 and a major credit crunch occurred in 1998.

The US economy has been badly hit by the subprime mortgage crisis and the IMF forecast a “mild recession” with annual growth at a paltry 0.5 percent for 2008.

However, the comparison with Japan may not be accurate because of America’s openness, resilience and entrepreneurship. It can find ways to reinvent itself which Japan and Europe often lacks. Washington has also learned from Tokyo’s mistakes in some respects, particularly in supplying liquidity to embattled financial institutions.

The Federal Reserve and the Treasury were thus quick to realise the magnitude of the risk, and will continue to take drastic action. Significant challenges remain, however: the structural deficits in the US (balance of trade, budget and national debt) have to be addressed otherwise the dollar will remain weak.

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