The United States is not Japan. Whenever the American economy sputters, multiple queries emerge about whether the US will suffer the same fate as Japan’s two decade period of stagnation and deflation.

Recently the core Consumer Price Index in the US rose by only 0.6 percent, the lowest increase since the government started recording the data in 1957. This has raised the spectre of deflation and the potential risk of the ‘Japanification’ of the US economy. Federal Reserve President Bullard commented that he remains concerned about disinflation trends and that ‘US policy should strive to avoid the possibility of a Japanese deflation’.

Why does the US need to avoid this? Well, according to analysis done by Bank of America Merrill Lynch, the ‘Japanification’ of the US economy and asset markets implies: 1) A Federal Reserve funds rate below 0.5 percent until AT LEAST 2020. 2) Average annual GDP of only about one percent over the next 20 years. 3) A gradual drop of the Dow Jones Industrial Average below 4,000 before 2030. 4) A continued fall in average housing prices to around $100,000 before 2030 Not a pretty picture. The good news is this is not likely for the US.

There are many common aspects between the Japanese collapse and the current US economic predicament. Both countries suffered severe recessions and balance sheets that went from boom to bust. Interest rates were cut but the consumer’s response has been tepid in both cases. A period of high levels of debt is now being followed by a rapid period of deleveraging. However, there are aspects that clearly indicate that the US is not Japan.First, the relative size of each country’s preceding bubble is markedly different. The asset price bubble that preceded the Japanese collapse absolutely dwarfs that of the US.

The real estate bubble in Japan was epic in proportion. At one point grounds of the Imperial Palace in Japan were valued higher than all of the property in the State of California. Land the size of a newspaper sold for more than $30,000.

The US property bubble was large but nowhere near this excessive. The level of non-financial debt as a percent of GDP in both countries was also different. Japanese debt levels went from 330 percent of GDP to 500 percent, the US increase was far less spectacular - rising from 180 percent to 240 percent.

Second, the TOPIX and the S&P 500 are much different in their composition and valuation. At the peak the TOPIX price earnings ratio (PE) was about 60x. The S&P 500 Index peak at the tech bubble was 30x and the more recent PE was about 17x before the financial crisis. In fact, for most of the 1990s and 2000s the TOPIX traded at a PE of about 20x compared to the current PE of only about 14x for the S&P 500. Also the S&P 500 is far less domestically concentrated - roughly 40 percent of sales are foreign compared to the TOPIX’s sales exposure of about only 25 percent at its collapse. The S&P 500 currently benefits a great deal from emerging market growth.

Also the level of leverage for those corporations at the beginning of their respective collapse is far different. Japanese non-financial companies at the peak of the bubble carried a ratio of net debt to market capitalisation of nearly 60 percent compared to the US’s level of only 20 percent. US companies have a great opportunity to leverage up at low rates to fund share repurchase, global mergers and acquisitions and expand via capital expenditures and foreign investment. All these options can help to drive earnings.

One of the biggest differences between the Japanese experience and the one we are seeing in the US is policy responses. The US labour market, for example, has reacted quickly and sharply to this recession. Unemployment in the US has spiked abruptly and rapidly over the past two years. Due to its more inflexible labor structure, Japanese unemployment levels rose for over a decade - the harsh and dramatic restructuring was conducted over a much longer period which led to an extended period of inefficient production.

American authorities also moved far more rapidly than the Japanese to provide liquidity to capital markets and recapitalise their financial institutions. The Federal Reserve in the US almost immediately slashed the benchmark fed funds rate to nearly zero. The Bank of Japan allowed deflationary aspects to persist by waiting two years after the onset of their crisis to cut 100 basis points from its benchmark lending rate. In fact, it took five years to cut the rate to 50 basis points.

Also the Federal Reserve, along with the Treasury Department, acted almost immediately to bolster liquidity by lending to financial institutions on weaker collateral than usual and forming the Troubled Asset Relief Program.

The Japanese crisis was eight years old before they infused capital into the banks and they did not do any form of quantitative easing until about 10 years after the crisis. As a result of these policies, the US banks have taken the same charge-offs in 3.5 years as the Japanese banks did over five years.

In fact, they have taken massive mortgage-backed security losses while the Japanese banks were actually encouraged to carry nonperforming debt at par for a long period of time which ultimately burdened them and created a cash flow bind when the Asian crisis (1997/98) and the global capital spending recession (2000/01) hit. If we do not see a second wave of credit issues, the US banks look likely to start lending much sooner than Japanese banks.

On these factors it seems unlikely that the US will follow in the footsteps of Japan. The US economy is a large diversified and dynamic economy that is inextricably tied to global growth. It would not be surprising to see a continued rebound over the next few years.