Condemning Those Who Forget History

Financial analysts are starting to notice a disturbing correlation between the present economic crisis and the roots of the stagnation that gripped Japan for the better part of a decade starting in the 1990s.

In today’s New York Times, for example, Martin Flacker notes a surprising similarity between what the Federal Reserve has been doing and the actions that the Bank of Japan took in response to it’s crisis:

The Bank of Japan first lowered interest rates to zero in 1999 for a year and then again in 2001 for five years. The Japanese central bank was trying to contain a domestic financial crisis not unlike the one now crippling global markets, in which collapsing real estate and share prices caused the bankruptcy of large financial companies, like Yamaichi Securities in 1997.

The central bank’s hope was that by lowering borrowing costs to virtually nil, it could encourage commercial banks to lend more money to businesses and consumers, rekindling demand.

Sound familiar ? It should, because it’s essentially the same thing that the Federal Reserve Board has been doing since September.

And the similarities don’t end there, Anthony Randazzo at Reason notes the five mistakes that Japan made when faced with a bursting asset bubble:

First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.

According to Shigenori Shiratsuka, Deputy Director and Senior Economist at the Bank of Japan, even though firms became unprofitable, the government still encouraged lending to them to prevent losses from materializing. There were heavy concerns about a failing firm increasing unemployment.


Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.

Again, sound familiar ? The United States started doing that in September with the financial services bailout — which quickly expanded beyond the financial services industry as more and more companies sought to redefine themselves as banks in order to be eligible for government largesse — and continues today in the just-announced auto industry bailout.

Rather than letting the market liquidate these zombie companies in an orderly fashion, the Japanese government instead sought to prop them up, which only served to delay the inevitable day of reckoning, and divert money from more productive uses.

But if you thought the similarities between late 80’s Japan and America 2008 ended there, you’d be wrong; the Japanese also tried a healthy dose of Keyensian pump-priming:

As January 20 nears, Barack Obama’s ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the “stimulus” at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian “pump-priming” in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we’d recount the history of the last major country that tried to spend its way to “stimulus” — Japan during its “lost decade” of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment:

Over a period from 1992 through 1999, the Japanese injected 118.2 trillion Yen (the equivalent of about 203.4 billion US Dollars at current exchange rates) into the economy, and it didn’t help move the economy one bit. Japan’s economy was stagnant for a decade and didn’t start moving again until 2003:

Japan’s economy grow anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.

Do Barack Obama, George W. Bush, Hank Paulson, and Ben Bernanke really think that the United States can succeed where the Japanese so obviously failed ?

More importantly, can American’s learn from the mistakes committed by what was once the most dynamic economy in the world ?

We’d better hope so, otherwise we could be looking at a pretty long and bleak decade.

Cross-posted from Below The Beltway

  • persnickety curmudgeon

    It’s the Demographics Stupid! No matter what we do things are about to get ugly. MAYBE we can kick the can a couple years down the road.

    The Baby Boomers who led us to boom are now leading us to bust to bust. Sixty somethings cannot expect one 30 something to support 4 of them. They no longer need 2 cars ( or even 1) don’t need to save for their kids’ college (been there done that)buy a house, buy work clothes, eat out, buy gas for the commute, contribute to 401(k)’s etc. Sorry but the biggest and wealthiest population group don’t need to buy nothin no more. Look out below!

  • Jeff Molby

    Over a period from 1992 through 1999, the Japanese injected 118.2 trillion Yen (the equivalent of about 203.4 billion US Dollars at current exchange rates) into the economy, and it didn’t help move the economy one bit.

    That’s because they didn’t inject enough!

    j/k, but that’s what the Keynesians would answer.

  • Doug Mataconis


    Yea, I anticipate someone will say that……

  • Doug Mataconis

    It’s also worth noting that my currency conversion probably understates the extent of the 118.2 trillion Yen stimulus simply because the Yen is weaker now than it was back then.