Japan’s Lost Decade | 6 Lessons Learned That May Help The US Economy

Japan's Lost Decade

Decades ago, Japan’s economy was the envy of the world, ranking first in GNP per capita in the late 1980s. Then, this Asian tiger was brought to its knees for the next decade for a variety of reasons, its economy slowed to a crawl primarily due to the twin “Ds” of debt and deflation, never to regain its previous stature.

Many economists are wondering if the United States is in the midst of a similar “lost decade,” and they are scrambling to study the slowing of Japan’s growth in the 1990s in search of lessons that could help the U.S. to rev its economic engine again. Here is a consensus of what analysts are saying about Japan’s Lost Decade and what the U.S. can learn from it:

Learn from Japan’s spending

and Saving habits.

Even though the slowdowns of the two economies appear similar, their causes do differ significantly. That means that some lessons can be drawn from Japan, but the countries are dissimilar enough to prohibit direct correlations and solutions. For instance, many economists attribute part of the blame for Japan’s woes on its aging population, a circumstance that the U.S. does not share. Similarly, the countries’ citizens have very different spending and saving habits, differences that will never be overcome by any insightful economic policy. Thus, the “lessons” from Japan are limited.

To Much or Too Little Stimulus?

Perhaps the biggest lesson from Japan’s lost decade is that someone or something must act quickly to limit the scope of the crisis. The Bank of Japan was slow to intervene, and this seriously hurt the confidence of investors and amplified the problem. Whether or not you are a fan of government intervention, it did need to get involved in the U.S. slowdown before the crisis worsened. How it intervened is certainly up for debate. If all economists’ opinions are figured in, especially those with a great familiarity with Japan, they would argue for more government intervention, not less. Many of those same economists view the Obama administration’s stimulus package as underwhelming and insufficient. As an example of government spending pulling an economy out of crisis, many point to the U.S. climbing out of the Great Depression, thanks to spending to fund World War II.

Clean up the balance sheet-Debt a Major Problem

Debt must decrease on all levels. Japan’s debt was a major factor in its lost decade. The U.S. must get serious about its debt if it is to climb out of its ditch in the near future. That means debt on a national and personal level. How (and if) that can be accomplished is, again, open for debate. Most would argue that personal debt be remedied before national debt.

Social Contract of Retirement-more scrutiny needed

The entire issue of retirement is a key matter in economic slowdowns the world over. This social contract of retirement and its benefits should come under even more scrutiny before the younger generation’s economic power is cut as it funds the golden years of others.

Let banks fail-If the deserve to

In a similar way, the banking system needs to be carefully examined as well. Some economists argue for a nationalization of banks, which is unlikely, but again, the lesson from Japan is to not act timidly for fear of public reaction, but to act decisively with the long term in mind. Others would argue for allowing banks to fold more easily, something Japan was reluctant to do, but which occurred anyway. Many would argue that the U.S. decision to let some banks fail and others to be rescued was a good one.

Japan’s raising taxes created aftershock in 1997

Raising taxes on consumers who are trying to crawl out of debt is probably not the best medicine for the economy. Many of those familiar with Japan argue that the 1997 aftershock was due to the government cutting spending and raising taxes. Until consumers get their personal balance sheets in order, they will not spend and borrow at needed levels to stimulate the economy. Raising taxes could deal a second blow to the average citizen that could bring further slowdown, as it did in Japan.

Even though Americans would love to find an obscure solution to its sluggish economy, they cannot uncover a panacea simply by studying Japan’s Lost Decade. There are certainly some mistakes to be avoided, but the cultures and economic systems are different enough to limit the application of Japan’s process of recovery to the U.S. In summary, the best lessons from Japan’s Lost Decade might be regarding what not to do when an economy stagnates.