Finally, Japan has been hit with bad luck. "The balance-sheet recession ended in 2006," Amaki says. "Companies became more willing to take on debt to finance growth." The 2008 financial crisis soon put an end to that, and the 2011 earthquake, tsunami and nuclear power station meltdown put a big cramp in Japan's GDP.
Why it's different in U.S.
Economists say that the U.S. may avoid a Japan-like period of malaise. The Federal Reserve was very quick to react to the 2008 financial crisis, pushing interest rates down to near zero.
U.S. consumers are paying down their debt and saving more, Amaki says. Although that's a slow process, consumers have come to realize that paying off a debt is like getting a raise: It increases your disposable income. Eventually, that will translate into more spending. "The American consumer won't change," Silvia says.
What could go wrong? Plenty. "When I look at the argument between political parties about whether to rein in spending or raise taxes, it reminds me of what happened in Japan," says Amaki, referring to Japan's increase in consumption taxes. In the short term, he says, raising taxes or slamming on the brakes in spending would be "a terrible idea."
Similarly, a rate increase could weaken economic growth further, Silvia says. "Housing starts are continuing to struggle with mortgage rates at 4%," he says. Raising rates would make the struggle even worse.
Lessons for U.S. investors
For investors, the specter of a long period of malaise means a long period of low returns. Nevertheless, despite the chronically bad market, some Japanese stocks fared well. What investors can learn from Japan:
•Profits. "Stock prices follow earnings," Kennedy says. Although the broad market fared poorly in Japan, some industries fared better than others. Japanese financial services companies, for example, were a disaster. "It's appalling how much wealth destruction they caused," Kennedy says. Not surprisingly, Japanese bank earnings have been poor.
But some Japanese industries did well. Autos, for example, prospered until competition from South Korea cut into sales. (The rising value of the Japanese yen also made Japan's autos more expensive abroad.) Japanese factory automation is now doing well, although it, too, may be threatened by competition from China.
•Price cutting. In a deflationary period, people love bargains. Companies that can undercut competitors with quality items flourish in a deflationary environment. So it's no surprise that domestic Japanese stores that cater to bargain-hunters fared well. "Any area where the consumer feels like he or she is getting a good deal," Kennedy says.
One example — not in Kennedy's portfolio, according to Morningstar — is Don Quijote, a discount store that has grown to 150 stores since 1980. The company offers an eclectic mix of bargain products and amusements, including a yet-unfinished roller-coaster in downtown Tokyo.
•Flexibility. The downfall of many Japanese companies was that they didn't react quickly enough to change. Japan's automakers, for example, have struggled against their Korean competition, as have electronics manufacturers. "The big difference between U.S. and Japanese companies is the ability to reinvent themselves," Kennedy says.
In the U.S., the low value of the dollar has given manufacturers a boost: U.S. goods sold abroad are now cheaper because of the swooning greenback. And, while the U.S. manufacturing sector is always described as shrinking, that's because U.S. factories are highly efficient. The U.S. manufacturing sector remains the largest in the world.
If you're betting on a long, subpar period — and many investors, such as Bill Gross of Pimco are doing just that — then you can learn some lessons from Japan. Look for domestic companies with rising earnings and an ability to cut prices.
And be careful what you wish for, Amaki says. "When I see the arguments between political parties about raising taxes or cutting spending, I think of what happened in Japan in 1997," he says. "It would be a terribly bad idea."
This story first appeared in USA Today.