Top Investment Bank Does Not See Japan’s Past in U.S. Economy

With yields on 10-year U.S. treasuries following a similar  pattern to 10-year Japanese government bond yields during the Japanese recession, many economists are drawing parallels between the two countries.

Nomura’s Richard Koo has repeatedly pointed out such parallels between the two economies.

But a new Deutsche Bank (NYSE:DB) report says beyond the similarity in bond yields, there isn’t much else that the two economies have in common.

First, the U.S. monetary policy adapted faster and more aggressively to changes in its economy, moreover, the U.S. economy is far more flexible than Japan’s. We’ve pulled together six charts from the report that point out the differences in the two.

Japan’s central bank was very slow in responding with rate cuts given the economic slowdown

Japan's central bank was very slow in responding with rate cuts given the economic slowdown

“For monetary policy to have stabilized the economy, short rates needed to go down through the growth rate in nominal GDP much sooner and much faster than what was the case. No wonder Japan then entered into a liquidity trap in 1994 and 1995, whereby short rates were zero but so too was nominal growth; rates could not go any lower at that point.”Source: Deutsche Bank

While the U.S. had the benefit of learning from Japan’s experience, and responded with deeper and faster cuts

While the U.S. had the benefit of learning from Japan's experience, and responded with deeper and faster cuts

“The fed funds rate remained below nominal GDP on average by about 40 bps from Q3 2007 through Q3 2008. However, this forceful cutting of interest rates was not enough to stabilize the economy in the aftermath of the Lehman Brothers bankruptcy.”Source: Deutsche Bank

But a low Feds fund rate is stimulative to the economy

But a low Feds fund rate is stimulative to the economy

Aggressive fiscal stimulus and expansion of the Fed’s balance sheet pushed nominal GDP (not adjusted for inflation) back into positive territory.”Since then the spread between nominal GDP growth and the fed funds rate has remained comfortably wide. This tells us that economic activity should continue to expand as the spread between interest rates and nominal GDP is a useful leading indicator of economic activity.”

Source: Deutsche Bank

U.S. companies better at cutting costs, saw their corporate profits recover faster than Japanese companies

U.S. companies better at cutting costs, saw their corporate profits recover faster than Japanese companies

Corporate profits behaved similarly right before, and at the onset of the recession, but turned sharply different after. Surge in profits per private worker in the U.S. points to a gradual increase in the pace of hiring:”US corporate profits bottomed in Q4 2008 …and they accelerated sharply thereafter. In essence, companies cut costs so aggressively that even without any top line growth, corporate profitability stabilized.

…In Japan, a combination of tight monetary policy and a less flexible labor market helped push corporate profits lower—they did not bottom out until Q4 1993 or two and half years after the onset of recession.”

Source: Deutsche Bank

Which makes sense because the U.S. labor market adjusted to the recession much faster than Japan

Which makes sense because the U.S. labor market adjusted to the recession much faster than Japan

At the onset of the recession in Japan, the unemployment rate was 2.1% compared with 4.8% in the U.S. during the start of its 2007 recession. But it grew drastically in the U.S. jumping to 10% in about three years, while it took about 4 1/2 years to increase to 3.3% in Japan.”Basically, the labor market adjustment in the US was brutal: the rate increased to more than twice its cyclical trough in less than half the time compared to what happened in Japan, where the rate rose by only 60% from its cyclical trough.”

Source: Deutsche Bank

U.S. households deleveraged faster than their Japanese counterparts freeing up money for them to spend

U.S. households deleveraged faster than their Japanese counterparts freeing up money for them to spend

“The savings rate in Japan essentially remained unchanged—perhaps because savings were so high to begin the cycle—while the savings rate in the US went up sharply—probably because it was extraordinarily low to begin the cycle. …Because the current savings rate in the US at 4.5% is modestly below its long term average. If job and income prospects improve somewhat going forward, US households will have the wherewithal to lift spending.”Source: Deutsche Bank

Read more cool stories at Business Insider.

Next read: How Many Jobs Does the US Economy Need to Add Per Month to Return to Pre-Crisis Levels?