Economy: Can We Avoid Japan's Mistakes?

"If you delay acting on an economy of this severity, [it potentially] becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they . . . suffered what was called the 'lost decade.'"
—President Barack Obama, Feb. 9

"The Japanese . . . had eight separate stimulus packages. . . . It was unprecedented. And it didn't work."
—Conservative TV talk show host Sean Hannity, Jan. 23

We argue by analogy. The president says that Japan's history demonstrates the need for his "stimulus package." To the contrary, claim Hannity and other conservatives, Japan shows that stimulus plans don't work. Up to a point, they're both right. But the possible parallels between Japan's experience and our own are much broader and pose the question of whether we, too, might face a "lost decade."

What happened to Japan in the 1990s?



Papers were written, conferences organized and the verdict rendered: The Japanese had botched it. After the "bubble economy" of the late 1980s burst, the Bank of Japan had eased credit too slowly. Burdened with bad loans, banks stopped lending; government didn't cleanse the banks quickly enough. Government stimulus packages were too little, too late. Naturally, the economy languished. All plausible—and wrong.


Japan has what Richard Katz, editor of the Oriental Economist, terms a "dual economy." On the one hand, export industries (autos, steel, electronics) are highly efficient. They face intense global competition. On the other, many domestic industries (food processing, construction, retailing) are inefficient and sheltered from local competition by regulations or custom.

This has suited most Japanese. Exports earned the foreign currency needed to buy food and fuel imports. Meanwhile, protected domestic industries provided the job security and social stability that most Japanese preferred to hyper-competition. While exports thrived, they -- and the supporting business investment—were Japan's engine of economic growth.

The trouble is that this system broke down in the mid-1980s. The rising yen made Japanese exports costlier on world markets. New competitors—South Korea, Taiwan—emerged. Japan lost its engine of growth and hasn't found a new one. That is Japan's central economic problem.

Government has tried. In the 1980s, the Bank of Japan sought to offset the effect of the higher yen with cheap credit. This backfired, resulting in the bubble economy. From 1985 to 1990, Tokyo land prices rose 134 percent; the stock market boomed. Since the bubble's collapse, there have been 13 stimulus plans, reckons economist Randall Jones of the Organization for Economic Cooperation and Development. Even now, the economy is dependent on trade; in December, exports dropped 35 percent from a year earlier, pushing Japan into a deep recession.




Join the Discussion