Big bubbles burst in the real estate market.
Property values plunge.
Consumers cut back on spending.
Companies lay off people.
A series of events reflects how the United States got into a recession.
There’s another county that was in an economic slump for a long time. Japan suffered a decade-long recession during the 1990s following a meltdown in the real estate market. Banks with bad assets hobbled the nation’s economic growth, and the world’s second largest economy remained stagnant for more than a decade — a period that Japanese call the Lost Decade.
When President Barack Obama made his case on a new stimulus package, he told Americans that without taking bold action, the United States would go through what Japan experienced.
Japan’s experience provides insight into the current recession, said Bonnie Buchanan, assistant professor of finance at Seattle University.
“A big similarity between Japan and the United States is a balance sheet recession,” Buchanan said.
Japanese corporations, especially banks, bought numerous assets on speculation that they would continue to appreciate in value. Once the economic boom ended, they ended up owing more money for those assets than they were worth.
Companies started focusing on reducing their debt, not growing their profits, Buchanan said. That made it difficult for an economic recovery to take place; jobs continued to be cut.
“The biggest lesson is how long this balance sheet recession continued in Japan,” Buchanan said. “How fast are we going to be able to get confidence back in our system?”
The Japanese central bank responded to the financial crisis by pumping taxpayers’ money into major banks hamstrung by bad assets and loans. The more capital the government injected, the more money troubled banks asked for. Public confidence in the banking system flagged, hurting the economy further.
“Most of the Lost Decade, Japanese needed to live with zombie banks,” she said.
It’s still up for debate whether the government bailouts prevented major banks from failing or they made the recession longer unnecessarily by intervening in the market, said Chris Weber, professor of economics at Seattle University.
“Maybe, they did the best they could,” Weber said.
Japan’s debt also skyrocketed in 1990s, as the government poured a lot of money into public works projects. But some roads and bridges didn’t get to be used much.
Weber said he’s concerned that the new stimulus package in the United States has too many pork barrel projects and may not revive the economy quickly. The package should have made unemployment insurance more generous, he said.
In the end, it was a combination of internal and external forces that started getting Japan out of the long recession in early 2000s. The government subjected major banks to thorough audits, getting to the bottom of their health to restore confidence in the banking system. And companies boosted exports to booming markets including China and the United States, leading to a steady economic growth until mid-2008.
Meanwhile, a solution for the current recession remains to be seen, Buchanan said.
“We are in an uncharted territory,” she said. “In 1990s, it was a country-specific recession, but now we are talking about a global recession.
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