Japan's Lost Lesson : Planet Money A financial crisis that began with the popping of a huge housing bubble and led to a stock market plunge and a banking crisis? That's right: We're talking about Japan in the 1990s.
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Japan's Lost Lesson

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Japan's Lost Lesson

Japan's Lost Lesson

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SIMON BANISH: (Foreign language spoken) PLANET MONEY in Berlin.



Yes, hello and welcome to PLANET MONEY from Berlin. I'm Caitlin Kenney.


And I'm Zoe Chace. Today is Tuesday, September 6. And that was Simon Banish (ph) you heard at the top. We talked to him outside the main train station here in Berlin.

KENNEY: We're here doing some stories on Germany's role in Europe, which makes us uniquely qualified to bring you today's PLANET MONEY Indicator.

CHACE: That's in the second. Today in the podcast, you're going to hear about another financial crisis - but not Europe's. This happened a decade ago. And it began with the popping of a huge housing bubble, which led to a stock market plunge and then a banking crisis.

KENNEY: We're talking about Japan's lost decade.

CHACE: But first - the aforementioned PLANET MONEY Indicator from us in Berlin, where our pockets are filled with euros.

KENNEY: Today's PLANET MONEY Indicator is 1.2.

CHACE: One euro is worth at least 1.2 Swiss francs forever.

KENNEY: Well, that's if the Swiss National Bank gets its way. So here's what happened. The Swiss franc, as we talked about in a recent podcast, has been getting stronger and stronger. And that's because investors around the world are nervous. And they're looking for a safe place to put their money. But here's the thing. The Swiss Central Bank, they're over it because a super strong Swiss franc is actually not good for the country. It means that Swiss companies, their products are getting too expensive because they're sold in francs. And that means that Swiss companies can't compete because people outside the country can't afford to buy their products.

CHACE: The Swiss economy depends on exports. And their export sector took a dramatic hit. So the central bank stepped in and said, hey, we're going to help. We'll buy as many euros as it takes - unlimited quantities of euros to keep the Swiss franc from getting too much stronger than the euro. So, Caitlin, you and I went to a bureau de change in the Berlin train station just to double-check - make sure that one euro gets you at least 1.2 Swiss francs.

KENNEY: Zoe, we're here at the main train station here in Berlin sitting outside a place where they change money. And we're going to go inside and give them a euro and see how many Swiss francs I get. Now we know...

CHACE: Hopefully, it shouldn't be a big surprise.

KENNEY: Exactly.

CHACE: OK. So, Caitlin...


CHACE: I'm going to pull one of the many euros that I have here in my wallet out.

KENNEY: OK. So I've got one euro here in my hand.

CHACE: They wouldn't let us record. So Caitlin's going to go in there.

KENNEY: Oh, this actually - this euro's from Spain. It says Espana. OK. So I'm going to - I have this euro. I'm going to go inside and see how many Swiss francs I get, OK.

CHACE: All right. And Caitlin is coming. And I think a see a Swiss franc in her hand. I'm super excited. What do you got?

KENNEY: I have - here we go. You ready? I got a cute little envelope that has it in.

CHACE: Looks like when you lose a tooth. Swiss francs, how many? OK.

KENNEY: One franc.

CHACE: One franc. What's that guy?

KENNEY: It's a 20.

CHACE: 1.2 francs.

KENNEY: Exactly.

CHACE: That's what one euro can buy you.


CHACE: That's super exciting. That's exactly what I expected to happen.

KENNEY: OK. So we're back in our hotel room in East Berlin. And since I couldn't record inside the place where I exchange the money, you didn't get to hear something really interesting the people working there told me. When I asked them how many Swiss francs I could buy with one euro yesterday, they said 1.15.

CHACE: And today, you got 1.2 Swiss francs - yesterday only 1.15. That means so far the Swiss Central Bank's plan is working.

KENNEY: Yeah, so far. Let's remember, Zoe. We're only one day in here. But for the moment, the Swiss franc is getting weaker against the euro. The Swiss are going to have to buy a lot of euros to keep this level in check. And that could be a problem.

CHACE: Right, OK. Onto the podcast. The podcast you'll here today originally aired in February of 2009.

KENNEY: Yeah, you may remember that was a particularly dark time for the real estate market in the U.S. Fannie Mae and Freddie Mac had to be taken over. The banking system was in serious trouble.

CHACE: And people kept telling Alex Blumberg and Adam Davidson that this had happened before in Japan.


ALEX BLUMBERG, BYLINE: There's this phrase that we keep hearing - the lost decade, Japan's lost decade. And this was the period of time in Japan - economists usually say it was from 1990 to 2002 about - when Japan, which was really doing well and thriving, just sort of fell down and couldn't get up.

ADAM DAVIDSON, BYLINE: We've been hearing so much. And we wanted to just say, all right, what is this thing? We just want to spell it out. When people say Japan's lost decade, what was it? What was so bad about it? Can we learn things about it? So to get to the bottom of that, I asked some people who's the best person to ask about this. And several people said Adam Posen from the Peterson Institute for International Economics. He studied Japan intensely in the '90s and still does. He's written several books on it, including one called appropriately the "Japanese Financial Crisis And Its Parallels With The U.S. Experience."

BLUMBERG: The interview sort of conducts itself, doesn't it?

DAVIDSON: Yes, we would just ask him to read the title of his book, actually. All right. So he told me that until we got ourselves into this mess, Japan was the place that was most fascinating for economists like him.

ADAM POSEN: Before we had the most recent bubble here, that was the famous bubble in financial circles up till the recent decade. So in Japan in the '80s, particularly from 1985 onward, their real estate shot up just as much as our real estate did - but not just housing, also their stock market, commercial real estate. There are stories about people going out for ice cream in Tokyo in 1989 and having gold leaf scattered on their ice cream.

You know, every reporter and every financial jockey wanted to be assigned to Tokyo because the living was very good. And you had Japanese companies and banks buying everything in sight - gambling on real estate, gambling on real estate abroad. So - I think it was Mitsubishi. I forget which company exactly bought a huge chain of pubs in England just because they felt like it. You know, it was a huge bubble. And then it ended as bubbles are - tend to do.

DAVIDSON: By definition.

POSEN: Yeah.

DAVIDSON: If it doesn't end, it's just a sustained growth.

POSEN: Right. And what's interesting is it ended in part because there was a regulatory tightening. The Ministry of Finance, the authorities in Japan said, well, people are being irresponsible with their lending. Let's put some new rules on mortgage lenders. Tighten it up. And at that point, the air started to go out of the system.

DAVIDSON: It does sound very similar to the subprime crisis.

POSEN: There's a lot of surface similarities, which is part of the reason people are starting to get spooked by the parallels. So if you're into this sort of thing, you can plot a graph of what's the price increases in average U.S. housing - the kind of thing Robert Shiller or Nouriel Roubini does - and overlay that with the Japanese lines from 15 years earlier. And they match. Stock market a little less - our stock market blew up a little less than theirs did - but pretty much the same sort of thing.

DAVIDSON: OK. So you've got me - you've got me a little concerned. So what happens in 1990? The housing prices...

POSEN: Start to go down.

DAVIDSON: Start to go down.

POSEN: Stock market goes down very precipitously. And you have a series of drops followed by plateaus, followed by drops basically from mid-1990 through late 1992. The real estate market, the housing market, the bond market - everything goes down in tandem, which is another one of the parallels that scares us now. Diversification doesn't seem to help. All the assets go down in tandem because you have at its core a banking system that's selling anything good to get cash in the short term.

DAVIDSON: I say the banks, just like banks here, they're just desperate to stay afloat. So they're selling stuff at fire sale prices just to get cash in the door.

POSEN: Exactly. And this is what economists call adverse selection, which is what we're seeing now and what we saw then - that a bank will tend to rollover its worst loans because it wants to hope that they'll actually be repaid some day. And if it writes them off, it gets wiped out. Whereas they'll sell off their good assets or close off their good loans because there's no upside potential to that. And they just need the cash.

DAVIDSON: Got you. So '90 to '92 is just freefall. We're on a rollercoaster going...

POSEN: Yeah, although there's some...

DAVIDSON: Although there's plateaus.

POSEN: Although there's plateaus. And it also just like here in the U.S. - and this is something that surprised me I must admit - it took a couple of years for it to transmit from the financial sector to the real economy. So growth in Japan, actually, wasn't that bad in 1990 - '91 just like growth in the U.S. wasn't that bad in most of 2008.


POSEN: But by '92, you're in a pretty steep recession. And it looked like a bad recession, and it was going to last roughly till '95. And as things go - again, this is not nice, but it's not unprecedented. If things that ended in '95 and the economy had recovered, we wouldn't be talking about it this way.

DAVIDSON: OK. So what happens in '95? Or what doesn't happen, I guess?

POSEN: Well, there's a big argument. I'm, of course, on the right side.

DAVIDSON: You mean correct side.


DAVIDSON: Not necessarily conservative.

POSEN: Yes, absolutely. I'm on the correct side. Thank you for correcting me. There are some people who say, once the bubbles burst, it was all over. And so then Japan - because the bubbles burst, it was consigned to this stagnation for 10 years because it was going take that long for companies and savers to work off the excesses.

DAVIDSON: OK. So you think this is not true.

POSEN: I think - and research I've done and a lot of other people done, I think, indicates this is fundamentally wrong because what happened in Japan was things were going to end in '95 in the sense that there was a recovery. But then the government messed up. The Japanese government promised to raise taxes in the early 1997 because they were worried about budget deficits. And they also played very nice, nice with the banks saying, well, we know you've got problems now. But maybe if we let you go for a couple of years, we're not nationalize you. We're not going to scrutinize you. Maybe you'll rebuild your capital. Both of which were huge mistakes.

DAVIDSON: So wait a second. In '95, they said, we're going to raise taxes down the road.

POSEN: They made a warning 18 months ahead. So that they were going to raise the consumption tax like a national sales tax - a pretty significant amount.

DAVIDSON: Got you.

POSEN: And it directly hit retailers. It directly hit small businesses. And meanwhile, the banks, for the reasons we already discussed, since nobody played tough with them, they just - the government didn't get involved. They just kept rolling over the bad loans.

DAVIDSON: So OK. And let's get to the banks. This is - are these what we call zombie banks?

POSEN: They only become zombie banks. They start out as little bit dazed. And then over time, they grow into zombies as their brains eat away.


POSEN: In other words, banks think with their capital. When they have enough capital, they act smart because then they've got something at stake. When banks lose capital and don't have anything personally at stake for the managers or the shareholders, they act dumb. They gamble.

DAVIDSON: Because - and if I can - let me see if I understand. So if I'm running a bank, and I've got, you know, $10 billion in assets, I can lose that 10 billion. And then I might lose my job, or I won't get a bonus or whatever. So I want to use that 10 billion to make more money, but I don't want to be crazy about it. But if I have nothing but fairy dust and some ability to borrow money, I know I basically don't have a job because I'm running an insolvent bank. So I might as well swing for the fences...

POSEN: Exactly.

DAVIDSON: ...And see if I can make a fortune.

POSEN: This is what we call gambling on resurrection. So the - essentially, the message I want to get across is Japan didn't have to turn out to be a lost decade. It could've been bad three years and done. But because the government made - didn't do stimulus, in fact, actually tightened policy and...

DAVIDSON: You mean?

POSEN: ...Actually raised taxes, reduced the amount of government spending in the economy, even were very slow to cut interest rates. And at the same time, the government didn't intervene properly in the banks. The banks just kept making the problem worse. They kept putting money into bad purposes and doing less lending.

DAVIDSON: So at sometime between - what? - '92 and '95, the government had gone to the banks and said, you guys are a bunch of morons. We're going to nationalize you.

POSEN: Right.

DAVIDSON: Or we're going to impose really strict rules. The banks would have suffered a lot in the short term potentially.

POSEN: Right.

DAVIDSON: But it it would've cleaned out the system more quickly.

POSEN: It would've cleaned out the more system. And it would've allowed the recovery to work because then you could do fiscal stimulus. You could do monetary easing. And it would be self-sustaining. And in fact, that's what Japan demonstrates. It took until 2001 when new Prime Minister Koizumi came in and put in place a very heroic economist - strange words - but, anyway, named Heizo Takenaka who came in and did exactly that. They pushed a big stimulus package. And they got incredibly tough with the banks. And the moment they did that, the economy started to recover. And Japan, actually, had its longest - not its strongest - but its longest post-war recovery from 2002 through middle of last year.

DAVIDSON: Oh, really.

POSEN: Yeah, so...

DAVIDSON: Even given the miracle years of the '70s and '80s....

POSEN: ...Right. I mean, they didn't grow as fast as in the '70s and '80s, but they did grow sustained without any recession.

DAVIDSON: So I want to wrap up with the lessons for now. Let me guess what your lesson is going to be based on what you've just said. Your lesson is it's in President Obama's hands and Congress' hands whether this becomes a short-term vicious recession or a long-term far more pernicious stagnation. Is that what you're trying to tell me?

POSEN: Exactly right. Exactly right. The bottom line is policy choices matter. You're going to have a recession, anyway. But whether it becomes Japan of the '90s - that great scary thing we talked about - basically depends on whether you make the wrong policy choices. You have to be willing to do stimulus, which they clearly are going to do. And you have to be willing to get tough with the banks, which it's not clear how rapidly they're going to do that. But I'm hopeful that those two legs of the policy will be much better under Obama than it was under the prime ministers in Japan who squandered that decade. And the biggest way to see this lesson is, when you got a prime minister who had the right policies, Japan recovered within a year.

DAVIDSON: Do you think we have the right president?

POSEN: I think we've got almost the right policies. I just wish that the Obama administration, the Congress would get aggressive - more aggressive with the banks than they've been.


THE NEW PORNOGRAPHERS: (Singing) Traffic was slow for the crash years. There's no other show like it around here as a rule.

KENNEY: All right. That's it for us today. We're going to have some stories from Germany in the next few weeks for you, including one about why the people living here would want to help bailout the Greek government.

CHACE: So until then, send us your comments, questions, ideas to planetmoney@npr.org.

KENNEY: Or you can find us on Facebook or Twitter. I'm Caitlin Kenney.

CHACE: And I'm Zoe Chace. Thanks for listening.

KENNEY: Auf Wiedersehen.


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