Whenever the American economy hits even a small snag, queries often emerge about whether it will suffer the same stagnation and deflation of Japan’s lost decade. For years now, the answer of “not likely” seemed right and was right. Though America and Japan share occasional similarities, the differences were always more pronounced. In this latest, more difficult time, that same conclusion still seems right, but there are more similarities now than in the past.

One big difference is, of course, the relative size of each country’s preceding bubbles. Quite simply, the asset price bubbles that burst in Japan dwarf those that occurred in the United States. Before the Japanese stock market collapsed, for example, it had hit multiples of three to four times those in the U.S. market at its peak. Before Japan’s real estate bubble burst, it had created far higher prices than ever developed in America. At Japan’s peak, prices had left reality so far behind that the grounds of the Imperial Palace (a large park in central Tokyo) were valued higher than all the property in the State of California. Also in Japan a piece of land the size of a newspaper sold for the equivalent of $30,000. To be sure, the newspaper was a broadsheet, not a tabloid, and it was in Tokyo’s fashionable Okasaka district; but still, the United States saw nothing to compare to this pricing, not even in Miami.

The United States also dealt with the bad debt of its real estate collapse much faster than did Japan, perhaps because it was a smaller crisis. Whereas U.S. banks and other financial institutions were forced by accounting law to write down their assets to something approaching market values, Japanese banks were permitted—indeed, they were encouraged by the authorities—to carry the nonperforming debt at par. Holding such “assets” naturally put Japanese banks into a cash-flow bind. Though the failure of debt in U.S. banks also constrained cash flows, the write-downs and write-offs relieved U.S. financial institutions of capital requirements that persisted in Japan and blocked lending there for years. Though American banks are not lending yet, they could if they chose to, even now. What is more, American businesses, at least larger firms, can supplement their credit needs in active commercial paper and corporate bond markets—options that Japan has to a much more limited degree.

American authorities after the bust also moved much more quickly than their Japanese counterparts to reliquify markets and financial institutions. Almost immediately, as the crisis unfolded in late 2008, the U.S. Federal Reserve brought down its benchmark fed funds rate toward zero. The Bank of Japan, by contrast, waited two years after the onset of the financial crisis to cut 100 basis points (bps) from its benchmark lending rate and five years before it brought that rate to 50 bps. That is still twice the Fed’s current target, and since by then Japan was already suffering from outright deflation, it was far higher in real terms. Also unlike Japan, the Fed acted quickly to bolster liquidity by lending to financial institutions on weaker collateral than usual. Such so-called quantitative easing did not get started in Japan until years after the initial crisis. The American authorities also quickly infused capital directly into the banks. However hurried or clumsy the government’s Troubled Asset Relief Program (TARP) was, Japan’s crisis was eight years old before the authorities infused funds directly into its banks.

Given the size of Japan’s problems and its tardy and rather passive response, it is easy to understand why financial and economic healing developed so slowly and, consequently, why a deflationary spiral developed and compounded both financial and economic problems, the one by burdening debtors with the need to meet their obligations with monies that are worth increasingly more in real terms and the other by encouraging people to delay purchases in order to get lower prices. Though deflation in the United States is possible, all the differences from Japan make this complicating outcome less likely. It is perhaps indicative, then, that Japanese real estate prices continue to slide even now, some 20 years after the crisis broke and today stand some 60–70% below their 1990 highs, while in America, residential real estate prices have begun to stabilize, having risen, according to the National Association of Realtors, 1.1% from year-ago levels to within 16% of their 2007 highs.

But as these huge differences remain, the United States in some respects seems set to follow aspects of Japan’s sad example. Certainly, tax policy seems set to follow Japan’s lead. Tax increases are one reason Japan has had so much difficulty breaking out of its long stagnation. Whenever that economy has gained any economic momentum, the Tokyo government either speaks of tax hikes or actually enacts them. Either move tends to stifle developing growth. Most notably in 1998, after Japan finally reliquified its financial institutions and began a tentative economic recovery, then-prime minister Ryutaro Hashimoto choked off growth by abruptly raising consumption taxes. Now the United States, facing its own tentative economic recovery, seems determined to follow this poor example and raise taxes. To be sure, Japan’s tax hikes concerned consumption taxes, while America’s concern income taxes, but such differences pale next to the stifling macroeconomic impact of either tax hike. What is more, House Speaker Nancy Pelosi (D-CA) and some administration figures have actively talked about a value-added tax (VAT) that would even more closely resemble Japan’s consumption tax.

Another area of growing, if not yet great, similarity has to do with the structure and direction of the respective economies. Japan’s troubles during these last 20 years stemmed in part from an inflexible, top-down economic structure. Japan’s system has long protected its corporate sector from both domestic and foreign competition in return for its close cooperation with government objectives. “The iron triangle—as this system is called for its three-way, corporate, bureaucratic, and political control—may have secured Japan’s rapid growth when it was still developing. But by the 1990s, as that country came abreast of the United States and needed more room for its own innovation, the top-down, rather bureaucratic system failed. Though no one could describe the United States in terms of such an iron triangle, the financial reform and healthcare reform legislation recently enacted, whatever their other virtues, both require much closer cooperation between Washington and business and interpose more government direction into business than previously, narrowing an important difference from Japan, at least at the margin.

On these bases, it is still hard to see the United States following in Japan’s footsteps, as so many have suggested of late. The differences between the two economies remain vast and still far outweigh any similarities. Probabilities in this suggest, then, that the United States will miss a Japan-like deflation and a lost decade(s) and that, if America suffers deflation at all, it will do so for only a short time. But since the differences are less pronounced than they once were, matters bear close watching, as each nation’s policies unfold and their respective economies react.

Milton Ezrati, Partner and Senior Economist and Market Strategist, has been widely published in a wide variety of magazines, scholarly journals, and newspapers, including The New York Times, Financial Times, The Wall Street Journal, The Christian Science Monitor, and Foreign Affairs, on a broad spectrum of investment management topics. Prior to joining Lord Abbett, Mr. Ezrati was Senior Vice President and head of investing in the Americas for Nomura Asset Management, where he helped direct investment strategies for both equity and fixed-income investment management.

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