Tweet
U.S. Hears Echo of Japan’s Woes
By MARTIN FACKLER and STEVE LOHR
Published: October 29, 2010
Mr. Kato led a government advisory committee that concluded that the economy, which was then finally starting to rebound from the collapse of its 1980s land and stock bubbles, was healthy enough to raise the national consumption tax to 5 percent from 3 percent.
Aimed at reducing deficits, the tax increase instead quickly snuffed out the fragile recovery, pushing Japan to the brink of a financial meltdown and thrusting the nation deeper into the economic morass from which it has yet to emerge even today.
“Our sins are large,” Mr. Kato, now president of Kaetsu University in Tokyo, said ruefully. “I hope the rest of the world can learn from this mistake.”
And indeed, the lessons of Japan’s long stagnation are well known to American policy makers like the treasury secretary, Timothy F. Geithner, and the chairman of the Federal Reserve, Ben S. Bernanke, who have studied Japan’s policy missteps.
In 1999, Mr. Bernanke, then an academic, tartly criticized Japanese officials for mishandling their 1990s financial crisis, saying Japan’s plight was “self induced.” Partly because of that expertise, American policy makers have long been confident, even during the darkest days of the current financial crisis, that the United States could avoid the fate of Japan and its two lost decades.
But now, with growing signs that the United States might be a lot closer to a Japan-style slump than previously thought, that confidence is waning.
In the United States, a robust recovery remains stubbornly elusive, and Mr. Bernanke is said to be ready to take new, unconventional steps to increase the money supply in order to maintain the uncertain growth of the past year. He is also said by close associates to favor further fiscal measures to stimulate the economy. But in the current political climate, with Republicans poised to make strong gains in the midterm elections while preaching fiscal austerity, the prospect of more federal stimulus spending seems remote, and it is unclear if monetary policy alone will be enough to restore healthy growth.
Partly as a result, some economists now predict that it could take years or even a decade for the American economy to regain the levels of employment and vigor achieved before the 2008 crisis. The growing political pressure for cuts in federal spending — along with plunging consumer confidence and companies that seem more intent on cutting costs and hoarding cash than investing in new growth — have led economists to talk of the United States’ entering a grim new era of austerity.
That is very close to what befell Japan two decades ago, when the seemingly invincible Asian economic juggernaut fell into a deep rut of chronically anemic demand and corrosive price declines, known as deflation, from which it has never fully recovered. The parallels are so striking, and unsettling, that economists are now taking a renewed look at Japan for insights on how the United States can avoid the deflation trap.
“There has been a political and intellectual arrogance in the United States that it won’t happen to us,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. “We shouldn’t be so smug. You can get there without being Japan.”
Indeed, the financial crisis that crippled Japan’s once high-flying economy appears an eerie precursor of the one that struck much of the global economy in 2008. In Japan, a huge expansion in credit created twin price bubbles in the land and stock markets that, when they burst in the late 1980s and early 1990s, left banks and other companies drowning in failed real estate investments.
But perhaps the most alarming part is what came next: a collapse in demand that pushed prices and ultimately wages into a self-reinforcing deflationary spiral, which made already stingy individuals and businesses even less willing to use money, because falling prices meant that cash itself gained in value.
Japan has remained trapped in this spiral despite the equivalent of trillions of dollars in stimulus spending, more than a decade of near-zero interest rates and even unconventional steps by the central bank similar to those now contemplated by Mr. Bernanke, like purchasing corporate and government bonds to increase the money supply.
Despite the strong parallels, there are still reasons to think the United States can escape what has been called Japanification.
The United States and Japan are very different, culturally and politically, and Japan faces a host of unique problems that have sapped its vitality, like a rapidly aging populace that has created generational tensions, and the closing of its doors to immigration and the youthful labor and fresh ideas that can bring. Economists say the dynamic United States economy has shaken off seemingly intractable slumps before, as in the frightening recession of 1980-82, when conditions and the prospects for recovery seemed, for a while, every bit as bleak as they do now.
However, some warn that the United States could still get it wrong, especially if the midterm elections produced a sharply divided political landscape.
“The danger is if the U.S. plunges into policy paralysis just like Japan in the 1990s,” said Shumpei Takemori, an economist at Keio University in Tokyo. “Ideological divides and political divides can make bold policy action impossible.”
In fact, some economists warn that the United States may be deeper into Japan-style stagnation than is widely realized. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the total output of the American economy this year will be no higher by his estimate than it was in 2006.
“We’ve already lost half a decade,” said Mr. Johnson, now a professor at the Massachusetts Institute of Technology.
more
By MARTIN FACKLER and STEVE LOHR
Published: October 29, 2010
Mr. Kato led a government advisory committee that concluded that the economy, which was then finally starting to rebound from the collapse of its 1980s land and stock bubbles, was healthy enough to raise the national consumption tax to 5 percent from 3 percent.
Aimed at reducing deficits, the tax increase instead quickly snuffed out the fragile recovery, pushing Japan to the brink of a financial meltdown and thrusting the nation deeper into the economic morass from which it has yet to emerge even today.
“Our sins are large,” Mr. Kato, now president of Kaetsu University in Tokyo, said ruefully. “I hope the rest of the world can learn from this mistake.”
And indeed, the lessons of Japan’s long stagnation are well known to American policy makers like the treasury secretary, Timothy F. Geithner, and the chairman of the Federal Reserve, Ben S. Bernanke, who have studied Japan’s policy missteps.
In 1999, Mr. Bernanke, then an academic, tartly criticized Japanese officials for mishandling their 1990s financial crisis, saying Japan’s plight was “self induced.” Partly because of that expertise, American policy makers have long been confident, even during the darkest days of the current financial crisis, that the United States could avoid the fate of Japan and its two lost decades.
But now, with growing signs that the United States might be a lot closer to a Japan-style slump than previously thought, that confidence is waning.
In the United States, a robust recovery remains stubbornly elusive, and Mr. Bernanke is said to be ready to take new, unconventional steps to increase the money supply in order to maintain the uncertain growth of the past year. He is also said by close associates to favor further fiscal measures to stimulate the economy. But in the current political climate, with Republicans poised to make strong gains in the midterm elections while preaching fiscal austerity, the prospect of more federal stimulus spending seems remote, and it is unclear if monetary policy alone will be enough to restore healthy growth.
Partly as a result, some economists now predict that it could take years or even a decade for the American economy to regain the levels of employment and vigor achieved before the 2008 crisis. The growing political pressure for cuts in federal spending — along with plunging consumer confidence and companies that seem more intent on cutting costs and hoarding cash than investing in new growth — have led economists to talk of the United States’ entering a grim new era of austerity.
That is very close to what befell Japan two decades ago, when the seemingly invincible Asian economic juggernaut fell into a deep rut of chronically anemic demand and corrosive price declines, known as deflation, from which it has never fully recovered. The parallels are so striking, and unsettling, that economists are now taking a renewed look at Japan for insights on how the United States can avoid the deflation trap.
“There has been a political and intellectual arrogance in the United States that it won’t happen to us,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. “We shouldn’t be so smug. You can get there without being Japan.”
Indeed, the financial crisis that crippled Japan’s once high-flying economy appears an eerie precursor of the one that struck much of the global economy in 2008. In Japan, a huge expansion in credit created twin price bubbles in the land and stock markets that, when they burst in the late 1980s and early 1990s, left banks and other companies drowning in failed real estate investments.
But perhaps the most alarming part is what came next: a collapse in demand that pushed prices and ultimately wages into a self-reinforcing deflationary spiral, which made already stingy individuals and businesses even less willing to use money, because falling prices meant that cash itself gained in value.
Japan has remained trapped in this spiral despite the equivalent of trillions of dollars in stimulus spending, more than a decade of near-zero interest rates and even unconventional steps by the central bank similar to those now contemplated by Mr. Bernanke, like purchasing corporate and government bonds to increase the money supply.
Despite the strong parallels, there are still reasons to think the United States can escape what has been called Japanification.
The United States and Japan are very different, culturally and politically, and Japan faces a host of unique problems that have sapped its vitality, like a rapidly aging populace that has created generational tensions, and the closing of its doors to immigration and the youthful labor and fresh ideas that can bring. Economists say the dynamic United States economy has shaken off seemingly intractable slumps before, as in the frightening recession of 1980-82, when conditions and the prospects for recovery seemed, for a while, every bit as bleak as they do now.
However, some warn that the United States could still get it wrong, especially if the midterm elections produced a sharply divided political landscape.
“The danger is if the U.S. plunges into policy paralysis just like Japan in the 1990s,” said Shumpei Takemori, an economist at Keio University in Tokyo. “Ideological divides and political divides can make bold policy action impossible.”
In fact, some economists warn that the United States may be deeper into Japan-style stagnation than is widely realized. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the total output of the American economy this year will be no higher by his estimate than it was in 2006.
“We’ve already lost half a decade,” said Mr. Johnson, now a professor at the Massachusetts Institute of Technology.
more
