Why the U.S. may not be the next Japan

NEW YORK (CNNMoney.com) -- The fashionable thing for economists to worry about these days is deflation.

It's hard to go a day without someone proselytizing that the United States is the next Japan and that a Lost Decade looms on the horizon -- or might already have even begun.

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The threat of deflation can't be cavalierly dismissed since there are plenty of troubling signs.

The job market is not recovering at a quick enough pace to spur consumers to spend. The housing market is still stagnant. And the Federal Reserve seems hell-bent on keeping both short-term and long-term rates low for the foreseeable future.

But some economists think there is a very important difference between Japan and the United States that can't be overlooked. And it could keep the U.S. from plunging into a long-term deflationary spiral. Demographics.

Simply put, the United States is not faced with as big of a percentage of people getting older and retiring as was the case in Japan during its Lost Decade.

According to research from Brockhouse Cooper, a brokerage firm based in Montreal, the percentage of people aged 65 or older nearly doubled in Japan between 1990 and 2008. Meanwhile, that percentage has stayed roughly the same in the U.S.

So even though there are a lot more people in the U.S. that are retiring as the Baby Boomer generation gets older, total population growth is rising due to high fertility rates and increased immigration. That's key since younger consumers tend to spend more.

"Demographics are the main difference between Japan and the United States. Aging in Japan was a huge issue that led to stagnation," said Alex Bellefleur, a financial economist with Brockhouse Cooper. "Senior citizens tend to have consumption patterns that are a lot different than their younger counterparts. They're not buying as many homes, cars and other durable goods."

There's also the issue of what governments have to do in order to support their aging populations. With a greater percentage of older retirees, that puts a bigger strain on fiscal budgets, which could contribute to deflationary pressure and economic sluggishness.

Along those lines, Japan currently has only 2.9 workers supporting retirees, said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm. By way of comparison, there are 5 workers for each retired person in the United States.

For that reason, Higgins said it is an "overly simplistic generalization" to suggest that the United States is destined for its own Lost Decade just because the U.S. and Japan both experienced a nasty downturn following an asset bubble.

Simply put, the strain on the U.S. government by an aging population shouldn't be as severe as it was in Japan.

Others point out that differences between the United States and Japan go beyond demographics. The most notable one is the fact that big U.S. banks appear to have edged back from the brink of disaster.

Most major banks are now profitable and nearly all of them have already paid back the funds they received from the controversial government TARP bailout.

Of course, this doesn't necessarily mean these banks are completely healthy again, but they are at least not the walking dead they were thought to be a year and a half ago.

"The Fed has acted aggressively and earlier than Japan did in the 1990s. Banks aren't zombies here the way they were in Japan. So even though deflation is a bit of a concern, it's not one that should be getting this much attention," said Andrew Busch, global currency and public policy strategist with BMO Capital Markets in Chicago.

Still, the deflation warning signs haven't completely gone away. And they are unlikely to do so for a long time. Let's be honest. The outlook for the economy, at best, over the next year or so is probably for a sluggish recovery.

John Norris, managing director with Oakworth Capital Bank in Birmingham, Ala., said that it doesn't matter if the U.S. has a smaller percentage of older people and that the Fed is keeping rates low.

He said the only way for the economy to improve is for consumers and banks to start acting more normally. After all, one reason banks are profitable again is because they are not taking any risks. It's all about money supply.

"I'm not losing sleep about a protracted bout of deflation. But if banks aren't lending and people aren't borrowing, you're going to see deflationary pressure. As long as the banking system is in dicey shape, you will have trouble," Norris said.

And fade out again. It's the August doldrums. So what better time for a pop culture quiz! Noticing that hot stock Netflix was finally taking a breather, I decided to ask my followers at Twitter to identify this appropriate song lyric. "But gravity always wins."

The winner is my CNNMoney.com colleague Julianne Pepitone. She joins my boss Chris Peacock and autos guru Peter Valdes-Dapena as co-workers who've won the coveted Buzz shout-out. She was the first to correctly point out the line was from "Fake Plastic Trees" by Radiohead. Congrats to Julianne for your quick-draw response and great taste in music!

Anyway, The Buzz is taking a one day hiatus tomorrow. Be back on Friday.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, La Monica does not own positions in any individual stocks.