Finding Past Parallels In Economic MessJapan suffered through a recession in the 1990s — a downturn they combatted with stimulus. As Japan's economy takes a turn for the worse again, what does that say about the U.S. stimulus plan? Adam Posen, deputy director of the Peterson Institute for International Economics, talks about how Japan's current and past economic situations mirror our own.
Japan suffered through a recession in the 1990s — a downturn they combatted with stimulus. As Japan's economy takes a turn for the worse again, what does that say about the U.S. stimulus plan? Adam Posen, deputy director of the Peterson Institute for International Economics, talks about how Japan's current and past economic situations mirror our own.
MADELEINE BRAND, host:
Treasury Secretary Geithner says the years he spent as an attache to the U.S. embassy in Tokyo taught him valuable lessons about economic recovery. Since its real-estate bubble burst in the late 1980s, the Japanese have failed to get their economy back on track. In fact, recently, the head of the Japanese Central Bank says the country is experiencing an unimaginable contraction. Adam Posen is the deputy director of the Peterson Institute for International Economics, and he studies the Japanese economy. And first, if you would, run down for us the characteristics of the Japanese crisis, and I understand that now, for the first time, they're confronting rising homelessness, a vanishing social safety net; almost unthinkable for Japanese, right?
Dr. ADAM S. POSEN (Deputy Director, Peter G. Peterson Institute for International Economics): Yes, although I think there's a tendency to over dramatize it. What Tim Geithner identified and essentially started his noticeable career by seeing that Japan's problems were serious in the early '90s was something that lasted about a decade, until 2002. And it was a period of very slow growth, very low investment, of rising unemployment, and all connected with banking problems as well as very passive government action.
But what's interesting is in 2001, a new prime minister came in, Junichiro Koizumi, and he appointed his own - sort of like Larry Summers now, his own czar of economic policy, a former professor, Heizo Takenaka, and they completely reversed the Japanese policy mistakes of the '90s. They were very tough on the banks in terms of re-capitalizing. They were very aggressive in fiscal stimulus. And Japan, despite your lead-in, actually grew pretty strongly from 2002 through 2008. Of late, things have turned worse again. Japan is experiencing some disruptions it never has before, because they've now had a lot of temporary workers and non-part-time workers and all kinds of what we call low-attachment labor force. I would just point out, though, that Japan right now isn't suffering because of problems inside Japan; Japan right now is caught up in the global crisis.
BRAND: So, to get out of its previous problems beginning in 1989, it embarked on a massive stimulus program, where the government spent trillions on public-works programs, bridges, dams, roads, et cetera. Did it work?
Dr. POSEN: Again, I'm sorry to be a bit argumentative, but the facts have been distorted. Japan claimed they were doing a very big public-spending program starting in '89. They claimed they were going to do all the stuff working with their equivalent of the state and local governments. And in the end, they spent very little money, or whenever they spent the money, they offset it by increasing taxes. It did work in the sense that, in 1998, and then again in 2001, 2002, when they really did do stimulus and they didn't offset it with taxes and they didn't force the states to put up money they didn't have, it actually did expand the economy.
BRAND: So, Tim Geithner has looked at that, and he has come to what conclusion?
Dr. POSEN: Well, I can't read Tim's mind, but based on past conversations with Secretary Geithner, he's come to a couple conclusions. First conclusion is you have to be out in front of events; you can't let them build up momentum. And that's part of the thinking that was at the Federal Reserve. Ben Bernanke, the chairman there, has also studied the Japan case and has that view as well. So, you want to be stimulating things aggressively. The second thing that, I think, Geithner learned from the Japan case is you can't - you do have to clean up the banks. You can do stimulus; it will buy you time, but you won't have a sustained private-sector recovery after the stimulus runs out unless you've cleaned up the banks.
BRAND: You know, I think a lot of people would be surprised by what you just said, that they didn't spend enough on the public-works program, because it seemed like almost every aspect of Japanese society was touched by government spending, at least during the 1990s. And I'm wondering, was the money spent on the wrong projects? In other words, should they have not spent so much on roads, on dams and bridges and spent more on, let's say, education?
Dr. POSEN: When you look at the Japan experience, what they tell you is, A, you want to do things that don't affect only one part of the country, for various political reasons. So, imagine if instead of Montana having two senators, despite having a tiny population, in Japan, the equivalent of Montana has six senators. And New York City, instead of having relatively few representatives by comparison, Tokyo has half as many representatives as New York City. And so, all the public-works spending in Japan tended to be thrown into the rural areas, directed at farmers - and that's even crazier for them; they have lots more farmers than we do. And so, the money was wasted. But ultimately, the big thing wasn't so much the structure of the stimulus; it was this insistence they had based on bureaucrats in - very powerful bureaucrats in the finance ministry who never wanted to go into deficit.
BRAND: You're saying now that Japan's problems are really caught up with the world economic situation. So, in essence, will they have to basically follow what happens here in the United States to try to clean up their banking system, or can they do anything differently?
Dr. POSEN: It's very interesting, in some ways, heartening, that since Koizumi and Takenaka reformed the Japanese Banking System in 2002, 2003, they haven't made many of the same mistakes. So, unlike American banks or British banks or German banks or French banks...
(Soundbite of laughter)
Dr. POSEN: Or Swiss banks - the whole list goes on - Japanese banks actually bought very little of the toxic stuff; they didn't make that many bad loans. They're just sort of suffering through a very sharp recession. They still have a problem - and this is a good lesson for all of us - that their banks hold a lot of stock in nonfinancial companies. So, when the economy tends to go down, there's this mutually reinforcing accelerator. So, if profits go down at a Toyota or a Honda or a Canon, then the value of the capital, the bank hold, goes down, and then the banks lend less, and then profits go down the rest of the country. And so, that's something they need to think about unwinding, and that's something we should be careful about now, when we talk about having all these assets on banks' books. The global nature, though, is Japan is very dependent on exports, and that number understates how much their production is intergraded with workers here in the U.S. and in China and throughout Asia. So, until China and U.S. recover, it's unlikely for Japan to recover.
BRAND: So, until we start buying Toyota trucks again and consumer electronics, Japan is going to suffer.
Dr. POSEN: Yeah. Although, remember that most Toyota trucks that are sold in the U.S. are built in the U.S. So, not buying Toyota trucks also makes Americans suffer some, too.
Dr. POSEN: But I guess the point I'm trying to make is if you're very dependent on the world economy, then you are, in some sense, victim to things outside your control. And that's what's happening in a range of countries, from Germany and Japan to China, where they were very dependent on the U.S. for demand, and so, when the U.S. turned down, it pulled the rest of the world down with it.
BRAND: Adam Posen is the deputy director of the Peterson Institute for International Economics. Thank you.
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What the U.S. Can Learn from Japan's 'Lost Decade'
Nearly two decades before America's mortgage crisis, Japan weathered a real estate crisis of its own. Economists who have studied both countries say Japan's experience offers important lessons:
Don't Procrastinate. Japan's central bank was slow to intervene, ignoring warning signs that some Japanese banks were in serious peril. By contrast, the U.S. Federal Reserve has twice cut short-term interest rates sharply — and may do so again.
Don't Try to Spend Your Way Out of a Crisis. Japan ramped up spending on public works projects. It didn't ease the financial crunch, and left the Japanese countryside riddled with concrete.
Save, Save, Save. Japan's economic fall was cushioned by the fact that Japanese consumers have one of the highest savings rates in the world. That allowed them to maintain virtually the same rates of consumption throughout the 1990s. American consumers have no such savings to draw upon.
Be Transparent. In Japan, it took years before the government stepped in and forced banks to come clean about bad loans. That prolonged the crisis, since nobody knew where the bottom was. In the U.S., where the financial system is generally more transparent, banks have already swallowed large write-offs for losses on subprime mortgage deals.
Imagine this scenario: Real estate prices plummet, banks falter and policymakers wring their hands while a nervous public watches and worries. America in 2008? No. Japan in 1990.
Nearly two decades before America's mortgage crisis, Japan weathered a real estate crisis of its own. And Japan's experience — while far from a carbon copy of America's — offers important lessons for the U.S., say economists who have studied both countries.
In some ways, the similarities are striking. Both housing bubbles involved reckless lending and high-flying real estate — commercial in Japan, residential in the U.S. As in the U.S., Japan was flooded with cheap and easy credit, thanks to newfangled financial products such as derivatives. Real estate prices soared. For a while, the tiny spit of land surrounding the Imperial Palace in central Tokyo was worth more than the entire state of California, and a $1,000 bill (if such a thing existed) would not pay for the surface area it would cover in the city's Ginza district.
Japanese investors believed they had broken free of the usual boom-and-bust cycles. Everyone assumed that prices would continue to climb indefinitely. "Even if some local property markets tanked, (Japanese investors) figured, a nationwide bust was almost unthinkable. They were very wrong," scolds The Economist magazine.
Sound familiar? Such exuberance was also common in the U.S. just a few years ago, when homebuyers, real estate agents and speculators breathlessly opined that "real estate prices never go down."
Japan's Biggest Victims
Of course, they do. In the mid-1990s, real estate in Japan lost nearly two-thirds of its value. The economic woes lingered for 10 years, prompting the Japanese media to pin an unhappy sobriquet on the 1990s: "the lost decade." The Japanese economy — and by extension, the country's national pride — has never fully recovered from that economic downturn. The main Japanese stock market is hovering near an 18-year low, and the country's manufacturers now face stiff competition from China. The U.S., too, faces increased competition from China, so the current economic stumbles come at a bad time, economists say.
Japanese banks were the biggest victims of the country's real estate bust. They were in danger of insolvency, yet Japan's central bank was slow to intervene. Eventually, in 1995, the Bank of Japan began to cut interest rates, and today they are near zero percent. But by then the economic damage already had been done.
Among the Bank of Japan's critics was a prominent Princeton University economist, who blamed "exceptionally poor monetary policymaking" for the country's protracted malaise. The central bank's failure to lower interest rates in the early 1990s ultimately drove the economy into a deflationary death spiral, according to the Princeton academic.
That economist was Ben Bernanke, now chairman of the U.S. Federal Reserve. Bernanke has clearly taken the lessons of Japan to heart. The Fed has twice cut short-term interest rates sharply, lowering its benchmark rate to 3 percent, and suggesting that it is prepared to lower rates yet again. In addition, the Bush administration hopes the government's economic stimulus package — including tax rebates for families and tax breaks for businesses — will help boost the faltering economy.
Advantages for the U.S.
That quick action on the part of the Federal Reserve is one reason why many economists believe the U.S. is better positioned than Japan to weather a real estate crisis. The Japanese bubble burst at the end of the "miracle years" — a 30-year period when the economy headed in only one direction: up. When that trajectory finally reversed, "No one in Japan was willing to stand up and say 'We have a problem and action needs to be taken,' " says Daniel Alpert, a managing director at Westwood Capital, a New York investment bank. "In the U.S, we've been through enough financial cycles to understand that these things happen and they need to be corrected."
Another reason the U.S. is better positioned to weather the economic storm is that the storm in the U.S. is less severe than the one Japan faced. Even during the go-go years of the recent real estate boom, prices never approached those in Japan. (U.S. housing prices nationwide have declined about 10 percent from their peak, and most economists expect a further decline of 10 to 15 percent, though some parts of the country — namely California and Florida — are experiencing steeper declines.)
And Japan's corporations were far more dependent on commercial banks for financing than are today's U.S. multinationals, which have stockpiles of internal capital, as well as broader access to capital markets.
What's more, the U.S. financial system is generally more transparent than that in Japan. The country's industrial groups, or keiretsu, are chummy clubs, and banks were willing to quietly bail out a troubled firm with "no questions asked" loans. It was not until the late 1990s that the Japanese government stepped in and began forcing banks to come clean about bad loans.
By contrast, U.S. banks have already swallowed large write-offs for losses on subprime mortgage deals. And while the full extent of the mortgage meltdown remains to be seen, the U.S. is much closer to achieving what economists call "price discovery" — determining the true value of inflated real estate. Once that happens, the markets recover fairly quickly, according to Daniel Alpert.
If there is one lesson the U.S. should learn from Japan, he says, it's this: "Don't allow the situation to fester. Take immediate action."
More Spending Is Not the Answer
Another lesson from Japan: Don't try to spend your way out of an economic trough. Japan ramped up government spending on public works projects, including bridges and river "improvement" programs that literally lined many waterways with cement. But it didn't work, and today the only evidence of this spending binge is the ugly slabs of cement that mar the Japanese countryside.
In other ways, though, the U.S. is more vulnerable than Japan was in the 1990s. Japan has one of the highest savings rates in the world; the U.S. among the lowest. Japanese consumers, flush with savings, maintained virtually the same rates of consumption throughout the 1990s. American consumers have no such savings to draw upon — and, in fact, carry heavy debt loads — including debt accrued through home equity loans.
"It is the debt load of consumers in the U.S. that makes U.S. problems much worse than what happened in Japan," argues blogger Mike Shedlock in globaleconomicanalysis.com.
As many analysts have pointed out, millions of American homeowners used their houses as ATMs. That ATM, however, is now out of service and probably won't be open for business again anytime soon.
Eric Weiner was NPR's Tokyo correspondent from 1999 to 2003.