What Can U.S. Learn From Japan's Economic Crisis?

Lessons From Japan

Japan weathered an economic crisis of its own nearly two decades ago. Like the U.S., its financial crisis began in the real estate market. Economists who have studied the crisis say the experience offers valuable lessons for the U.S.

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STEVE INSKEEP, host:

And let's go to another financial capital, Japan, which is carefully watching the trouble in the U.S. too. That's because the Japanese have billions of dollars invested through U.S. financial institutions. And at this tense moment, Japan's ruling party chose a new leader today. Taro Aso is set to become Japan's new prime minister later this week, and he started out the week with a pledge not to allow America's financial crisis to drag down Japan too. His country has largely managed to dig out of its own financial collapse nearly 20 years ago, and that means Japan's experience could hold some lessons for the United States. NPR's Anthony Kuhn reports from Tokyo.

(Soundbite of Tokyo market trader shouting)

ANTHONY KUHN: At a bustling market in Tokyo's Ueno district, stores are packed in under the elevated railway tracks. Yoshihiro Furumi(ph) and his family run a modest little tea shop here. He's doing all right now, but he says it's nothing like the 1980s. Back then Japanese were borrowing money and buying up real estate. Property prices rocketed to about three times Japan's GDP. Mr. Furumi took out a bank loan to buy extra space and expand his business.

Mr. YOSHIHIRO FURUMI (Businessman, Tokyo, Japan): (Through Translator) Those were lively times. I spent money freely with confidence that I could earn more tomorrow. We had enough income to buy all the things we wanted.

KUHN: When the bubble finally burst in 1990, property prices plummeted 85 percent from their peak. Japan lost about $15 trillion of wealth, or three years worth of GDP. Even the Great Depression only wiped out about one year's worth of U.S. GDP. After the bust, Mr. Furumi decided that instead of using his extra space to sell tea, it would be safer to rent it out and use the rent money to pay off his loan.

Mr. FURUMI: (Through Translator) During the recession, no bank would loan us money. We had to protect ourselves. We had to sell off idle assets and pay down our debt. That's all we could think about.

KUHN: In response to economic hard times, the Japanese went into savings mode. The country now has $14 trillion in household savings. Mr. Furumi kept selling his tea, although less of it. Sony, Cannon, and Honda kept selling their products too, especially in the U.S. And this kept the cash coming in.

Mr. RICHARD KOO (Chief Economist, Nomura Research Institute): Even with this kind of collapse in asset prices, our GDP never fell below the peak of the bubble. Not even once.

KUHN: Richard Koo is chief economist at the Nomura Research Institute. He notes that during the Great Depression, U.S. GDP shrank by nearly half and unemployment soared to 25 percent. Japan's unemployment rate never surpassed six percent. It was able to do this, Koo said, because of intensive government spending on infrastructure, a sort of Japanese New Deal.

Mr. KOO: If the government takes these actions promptly and in sufficient quantity from the very beginning, even if asset prices collapse, the subprime loan market collapse, you can still keep the GDP going. And as long as you keep the GDP going, people have the income to pay down debt or rebuild their balance sheets.

KUHN: Critics point out that the spending led to corruption, waste, and a government debt worth around 150 percent of Japan's GDP. They urged Tokyo to lower interest rates to get people buying and investing again. But Koo argues that this didn't work in Japan, and it won't work now in the U.S.

Mr. KOO: These people are not going to respond to lower interest rates because they're not interested in borrowing money at any interest rate. And so during the Great Depression, also, and in Japan, and in the United States this time around, all this monetary easing completely struck out.

KUHN: It's taken nearly two decades, but Japan's banking system has managed to clean up $1 trillion worth of bad debt. That's about what the International Monetary Fund reckons the U.S. will lose this time. Most Japanese companies have managed to balance their books again.

(Soundbite of Tokyo market trader shouting)

KUHN: Back at the market, Mr. Furumi is relieved to say that after 20 years he's finally paid off his bank loan. Anthony Kuhn, NPR News, Tokyo.

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