Putting Japan's 'Lost Decade' In Perspective Opponents of President Obama's plan to use government spending to stimulate the U.S. economy cite the failure of a similar strategy by Japan in the 1990s. But a Tokyo economist argues Japan fared remarkably well during its "lost decade."

Putting Japan's 'Lost Decade' In Perspective

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Today, President Obama meets with Japan's prime minister here in Washington, which brings to mind something the president has been saying about Japan. When the president was urging Congress to pass a stimulus package, he held out this warning:

President BARACK OBAMA: If you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough and as a consequence, they suffered what was called the lost decade.

INSKEEP: The lost decade is how Japanese refer to their country in the 1990s. A real estate and stock bubble burst, consumers stopped spending, growth slowed, Japan was seen to be losing clout on the world stage. Sounds familiar to lots of Americans, but we're going to ask how real the comparison is today with Richard Koo. He's in Tokyo, and he's chief economist with the Nomura Research Institute. Welcome to the program.

Mr. RICHARD KOO (Chief Economist, Nomura Research Institute): Thank you.

INSKEEP: What did it feel like living through the lost decade?

Mr. KOO: Well, I think most foreigners would have found that there is no recession in this land. People are getting off the Tokyo Airport all surprised that everybody's well-dressed, well-fed, and everything is fine. We lost a decade in having not much growth. But the civil society remained largely intact.

And what is even more remarkable about the decade was that commercial real estate price declined of something like 87 percent nationwide. But we kept our employment going. Our unemployment rate never went above 5.5 percent, and it recovered quickly after that.

INSKEEP: When we say there was a giant real estate decline, there was a stock market bubble that burst, are these problems - and there were problems in the financial sector as well - are these problems similar to what the United States is facing now, or similar enough that we could learn from Japan's experience?

Mr. KOO: I believe so because Japan, after facing this bursting of the bubble and slowed-down economy, Japanese Central Bank lowered rates from over 8 percent to zero, and absolutely nothing happened. No increase in other prices, no increase in economic activity, and that's exactly what we're seeing United States today.

INSKEEP: What was the basic issue that caused all these collapses over a period of several years in Japan?

Mr. KOO: Well, that's the same issue that's happening in United States today, and that is that when other prices collapse with this kind of magnitude, and all these people who bought those assets with borrowed funds are left with balance sheets under water, they all started pay down debt. But when everybody's trying to repair their balance sheets all at the same time, then all these funds come into the banking system, but they won't able to leave the banking system because all the other people are paying down debt.

INSKEEP: So, we've defined the problem. You mentioned one thing that Japan's government tried to do about it - they lowered interest rates to almost nothing and had almost no effect because people just weren't in a situation or a mood to borrow at any interest rate. What else did the government try to do?

Mr. KOO: Then, the only way to keep the economy from falling into a deflationary spiral is for the government to do the opposite of the private sector. Meaning, government borrowing and spending the money that private sector is saving but not investing. And that's basically what Japan did over the last 18 years.

INSKEEP: Run up big budget deficits and borrow a lot of money, and spend it on highways and bridges and any number of other projects?

Mr. KOO: That's correct.

INSKEEP: And is it a problem that Japan's government now faces the task of paying back all that money?

Mr. KOO: Well, it's cheaper to spend lot of money and get the economy come out of this recession, than be stingy every step of the way and actually lengthen the recession unnecessarily. And so, yes, Japan did mostly right things keeping the GDP from falling but at the beginning, we had no clue that this is what I call balance sheet recession, because it's still not in economic textbooks anywhere in the world.

And so at the beginning we thought, wow, one big fiscal stimulus will do, and we did it. The economy began to improve. And then people started saying, oh, the budget deficit is too large. So, we cut the fiscal stimulus, economy collapsed again. Well, we have this zigzag for the last 15 years.

And it'd be great if President Obama come out and kind of issue a social contract with the people by saying, look, this is not ordinary recession, this is a balance sheet recession. And we cannot tell you not to repair your balance sheets, so we'll give you five years, or whatever years it may take, and during that time we, the government, will keep the GDP going.

And then once your private sector balance sheets are cleaned, then we will reverse our roles. Private sectors sorts will be borrowing and investing money and the government will be repairing its balance sheets.

INSKEEP: Richard Koo of the Nomura Research Institute in Tokyo. Thanks for the time.

Mr. KOO: Thank you very much.

INSKEEP: Japan is affected by the latest global trouble as much as anybody else, and today Japanese stock prices hit their lowest point since 1982. You can hear Richard Koo on why the current crisis has hit Japan so hard at our Web site, NPR.org.

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