Japan's Lost Decade: Mostly Embarrassment

In the Sunday edition of the New York Times, there was an article on the front page that discussed Japan's Lost Decade from the 1980s to the early 1990s.  The "Lost Decade" refers to Japan deflation problem that occurred after they had a huge economic boom in the 1980s.  This means that they saw a significant drop in prices and the value of the yen.  Thus, all the growth that Japan witnessed in the decades before meant nothing because their GDP is currently the same as it was during their time of growth.

Many predict that this is what will happen to the U.S. because the U.S. did not keep economic stimulus flowing to get out of the recession, so a drop in prices will occur creating our own "Lost Decade."  Nobel Prize winning economic Paul Krugman has been the one who has made this claim.  One thing that is important to emphasize here is that pundits usually will usually stick a label on something before it actually happens.  Remember a few months a ago when everyone was claiming we were heading for the next Great Depression, or when people thought inflation was going to be the problem?

The second point to emphasize is not just the economic impact from the "Lost Decade" on Japan, but how it changed its own view on its world standing.  For instance, the Time's article says:

The decline has been painful for the Japanese, with companies and individuals like Masato having lost the equivalent of trillions of dollars in the stock market, which is now just a quarter of its value in 1989, and in real estate, where the average price of a home is the same as it was in 1983. And the future looks even bleaker, as Japan faces the world’s largest government debt — around 200 percent of gross domestic product — a shrinking population and rising rates of poverty and suicide.

But perhaps the most noticeable impact here has been Japan’s crisis of confidence. Just two decades ago, this was a vibrant nation filled with energy and ambition, proud to the point of arrogance and eager to create a new economic order in Asia based on the yen. Today, those high-flying ambitions have been shelved, replaced by weariness and fear of the future, and an almost stifling air of resignation. Japan seems to have pulled into a shell, content to accept its slow fade from the global stage.

Its once voracious manufacturers now seem prepared to surrender industry after industry to hungry South Korean and Chinese rivals. Japanese consumers, who once flew by the planeload on flashy shopping trips to Manhattan and Paris, stay home more often now, saving their money for an uncertain future or setting new trends in frugality with discount brands like Uniqlo.

It seems that what made the crisis worse for Japan was the embarrassment it felt from the fall.  Everyone thought they would be the next big economic wonder, and they turned out to be a dud.  Whether or not the U.S. does face its own version of this tragedy, it should be noted that eventually we will fall from grace as the top economy.  We will have to face it.  It will probably be something similar to this scenario that does it.  What Americans should think about is how they will cope with not being able to buy what they want or feel like the most confident people in the room.  The U.S. will also not be the top dog in international forums anymore, which will hurt our negotiating power.

Japan's "Lost Decade" should teach the U.S. a lesson in humility and how to cope with embarrassment.  We'll lose the #1 spot someday, we just don't know when.