Press Release

Legal & General Investment Management explains why the United States won't spiral into a Japan-style slowdown

15/10/2008

At today’s Fundamentals briefing, Tim Drayson, Economist at Legal & General Investment Management discussed why the US financial crisis will not necessarily mimic the extended period of anaemic growth and falling asset prices that has plagued Japan for more than a decade.


Tim explained that both countries shared similar characteristics prior to the initial downturn. “Fuelling both credit booms was a belief that house prices would never fall”.

He also acknowledged that the US has to contend with some less favourable dynamics than Japan. “The US starts the downturn in a weaker fiscal position than Japan, with a very low savings rate and with credit markets seizing up”.

On the other hand, events have unfolded much more rapidly in the US than Japan. According to Tim, the Bank of Japan was far too slow to cut interest rates and while the US economy is heading for recession, labour markets and the financial sector have already been adjusting rapidly. “A combination of a different regulatory and political structure than Japan and intense market pressure is forcing a rapid restructuring of the US financial system.”

Crucially, Tim says, the US Federal Reserve has aggressively cut interest rates. “We are confident the Fed has the ability to avoid a repeat of Japan’s experience – even though a period of weak US economic growth now seems inevitable.”