Lessons from Japan’s ‘lost decade’

Currencies, Economic growth, Financial Events, Leverage

Japan loans right.jpg

In December, the blog noted that Japanese policymakers saw clear parallels between the mistakes they made during the ‘lost decade’ of the 1990’s, and those being made today in the USA and other Western countries. The New York Times now has a fascinating article on this subject, which notes that:

“The Japanese crisis of the 1990s and early 2000s had roots similar to the American crisis: a real estate bubble that collapsed, leaving banks holding trillions of yen in loans that were virtually worthless. Initially, Japan’s leaders underestimated how badly the real estate collapse would hurt the country’s banks. As in the United States, a policy of easy money had fuelled both stock and real estate speculation, as well as reckless lending by banks.

“Many in Japan thought that low interest rates and economic stimulus measures would help banks recover on their own. In late 1997, however, a string of bank failures set off a crippling credit crisis. Prodded into action, the government injected 1.8 trillion yen into Japan’s main banks. But the injections — too small, poorly planned and based on little understanding of the extent of the banking sector’s woes — failed to stem the growing crisis.”

It adds that “One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag.”

Depressingly, the NYT concludes that, “so far, the Obama administration’s plan avoids the hardest decisions, like nationalizing banks, wiping out shareholders or allowing banks to collapse under the weight of their own bad debts.” Denial, however, is not a viable policy, and the NYT notes that “in the end, Japan had to do all those things”.

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