What the U.S. Can Learn from Japan’s ‘Lost Decade’ to reform the system

September 24, 2008 by · Leave a Comment
Filed under: Economic News 

I believe this is an important lesson we can learn from Japan on how we build a strong economy. What is interesting is that fact that I am working with the AMI (American Monetary Institute) on a monetary reform bill that echoes some of the same actions Japan took to bring them out of a long recession after a period of major excess that had its spotlight in real estate. These are the areas that are of most important: currency reform, savings, exporting, middle class jobs and prudent regulation that maintains a free market while still having proper laws in place in areas that effect public well being like energy, insurance and real estate. I still believe we are going to see some more pain until the public “gets it” and only then we will see real change. I have been trying to get message out that their is an alternative that will make America stronger and set the proper example for all other countries. No I do not have a PHD in economics (going for one is an attractive thought with each day passing) but with that being said, I have a very extensive library on the subject (I stress extensive) and have also read a serious amount of financial history. I also have a number of mentors on this subject that know much more than I do so I feel I am giving you the readers very accurate information from my personal opinion so there is some bias but it is only as far to stress what I feel what the proper action is and also keeps in mind the plans that come from whoever still gets a fair shake if it merits one.

News Piece:

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.

Click Here to Continue Reading

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!