IMF seminar compares U.S. crisis to Japan in 1990s

The Sydney News.Net
Friday 20th March, 2009 (Barry Wood)

Experts on Japan's lost decade of bad loans, deflation and economic stagnation say there are similarities between that episode of the 1990s and the current economic crisis in the United States.

At a seminar at the International Monetary Fund in Washington, Takeo Hoshi of the University of California (San Diego) said the lesson of Japan's 1990s financial crisis is the absolute need to get bad loans out of the banking system.

Japan endured a decade of economic stagnation after a property and stock market bubble burst in 1990. Unsure how to halt falling prices (deflation), Japan's central bank cut interest rates to zero while the government repeatedly boosted spending to stimulate the economy. Nothing succeeded, says Hoshi, until the government removed non-performing loans from the banking system.

"Many of these measures that were tried and discussed in Japan, and now are being tried and discussed here, were not successful until the government finally decided to clean up, or force the banks, to clean their balance sheets by getting rid of the non-performing loans," said Hoshi.

Hoshi and other seminar participants believe U.S. policy makers may be repeating Japan's mistakes by refusing to move forcefully in getting bad loans off bank balance sheets.

Hoshi and Tokyo University professor Takatoshi Ito say Japanese policy makers waited too long, until 2002, to clean up the banking system. In recent months the U.S. government has propped up ailing banks with huge injections of taxpayer money, which so far have done little to restore financial health.

Ito told the IMF seminar that successive Japanese government stimulus packages in the 1990s similarly failed to trigger economic recovery. After a brief recovery early in this decade, Japan's economy is again in recession. Ito says instead of repeating the failed 1999 policy of handing government money directly to consumers, Japan should embark on a targeted program of government spending.

"I would just focus on just four areas: environment, medical and long-term care, agriculture and education," said Ito. "Those are the areas where our productivity could be increased with the right policies and that would contribute to sustainable growth."

The Obama administration is pinning its economic recovery hopes on a recently approved huge government spending program.

While the United States has not yet encountered the steep price declines or deflation that still afflicts Japan, both economies are currently shrinking. After registering almost no growth for a decade, Japan's until recently mildly recovering economy shrank at a 12 percent annual pace in the last three months of 2008. The U.S. economy, which registered strong growth until 2007, is currently declining at a three to five percent annual rate.

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