Resident Scholar Michael Auslin

As Hillary Clinton visits Tokyo for her first trip as secretary of state, she will find a country in the midst of its worst recession in 50 years. Japan's economy is contracting across the board: Exports have cratered, industrial production is on track to plummet 30 percent from a year ago, and the Japanese government projects that GDP will drop 12 percent from last year. The world's second largest economy, Japan is also the largest holder of U.S. Treasury bonds.

Recently, many economists and scholars in the U.S. have been looking backward to Japan's banking disaster of the 1990s, hoping to learn lessons for America's current crisis. Instead, they should be looking ahead to what might occur if Japan goes into a full-fledged depression.

If Japan's economy collapses, supply chains across the globe will be affected and numerous economies will face severe disruptions, most notably China's. China is currently Japan's largest import provider, and the Japanese slowdown is creating tremendous pressure on Chinese factories. Just last week, the Chinese government announced that 20 million rural migrants had lost their jobs.

Closer to home, Japan may also start running out of surplus cash, which it has used to purchase U.S. securities for years. For the first time in a generation, Tokyo is running trade deficits--five months in a row so far. . . .

Click here to view the full text of this article.

Michael Auslin is a resident scholar at AEI.