Lessons from Japan

Studying Japan's Dark Decade to See How U.S. Might Fare

By Anthony Faiola
Washington Post Staff Writer
Saturday, October 11, 2008; A13



The sky over Tokyo seemed to fall in September of 1990, when the Nikkei stock index dove almost 20 percent in one month. Real estate prices would plummet and the financial sector would crack, trapping Japan in a "lost decade" of economic growth. Is the United States now set for its own?

That prospect may not be as scary as it sounds.

It is too early to tell just how sharp a U.S. recession might be, but fears of a long malaise are conjuring images of Depression-era soup lines. If Japan is any guide, however, such fears may be out of proportion.

Japan in the 1990s saw billions of dollars worth of wealth disappear. A generation of "parasite singles" grew up, living with their parents well into their 30s. The suicide rate spiked, and university graduates spent years in part-time jobs. Japanese entrepreneurs had no or limited access to capital, stymieing innovation. Yet the standard of living for the average Japanese did not dramatically change -- the pain of the crisis unfolded over many years and the government refrained from dire pronouncements.

Unemployment would peak at only 5.5 percent, an enviable rate for much of the world in good times. Deflation -- or price declines as gloomy consumers and skeptical businesses put off purchasing -- sickened the economy. Yet leading experts now agree its impact was not as severe as originally thought.

Japan saw repeated years of low or negative growth, but the final tally was something short of a decade-long recession -- with the 10 years leading up to 2000 averaging out at almost 1 percent growth. Companies like Toyota would prosper in adverse times, forced to sharpen their competitive edge. Emerging in the 2000s as the leader in hybrid cars, Toyota found itself on stronger footing than its U.S. counterparts.

Japanese architecture, art and fashion would undergo a renaissance, turning Japan into a cultural superpower with a deep imprint on global television, music and entertainment. It has indisputably lost luster, yet the Japanese economy, 18 years after the stock meltdown, remains the world's second largest.

"We are all spooked out of our minds because of the last three weeks, but just as we've seen in Japan, this doesn't have to be that tough," said Adam Posen, deputy director of the Peterson Institute for International Economics. "Sure, it's bad for vulnerable people, those on fixed incomes and someone who is about to retire. But if the average American goes through what the average Japanese did, it does not have to be a huge setback."

Economists caution there are myriad differences between the crisis in the United States and the one in Japan, potentially worsening the outlook for millions of Americans. Though the Japanese saw their house values drop 62 percent and saw trillions of yen disappear in the stock market crash, they maintained one of the highest savings rates in the world in stark contrast to indebted Americans. That was true also on a national basis. Unlike the United States, export-driven Japan enjoyed a huge trade surplus.

Most importantly, the crisis was largely confined to Japan, which could rely on global demand, chiefly from the United States but also from a fast-growing China, to buy its goods and keep its economy afloat.

The crisis now, however, is global. Though the United States exported its way to growth earlier this year, taking advantage of the weaker dollar that made U.S. products more competitive, Europe and Japan are now joining the United States in slipping toward recession.

"The situation now is completely different; the United States unlike Japan in the 1990s does not have the rest of the world to soften the blow," said Liliana Rojas-Suarez, a senior fellow at the Center for Global Development.

The long, dull economic pain -- as opposed to the sharp pinch in the United States -- happened in part because of what economists have called Japan's fatal flaw: a delayed reaction.

While the Japanese financial crisis had both parallels and sharp differences to the one facing the United States -- both countries faced bursting real estate bubbles and needed to address billions of dollars worth of bad loans on the books of banks -- officials there took the opposite approach to solving it.

In direct contrast to doomsaying U.S. officials who called for a fast $700 billion bailout to avoid financial collapse, the Japanese government steadily reassured the public that its banking system was solid, prolonging any real fixes for at least seven years. That had the effect of making the Japanese economy gradually worse. But it also blunted the sense of intense, immediate panic that has washed over Wall Street in the past three weeks.

Economists still fault the regulators in Japan for their slow reaction; in some instances, government officials colluded with financial institutions to hide the extent of the problems. Yet in light of how quickly the U.S. financial crisis has exploded, there is new debate about whether there may have been some method to Japanese madness.

"The question now is whether you really can postpone the worst by ignoring it for 10 years," said Alex Patelis, Head of International Economics for Merrill Lynch.