"If you delay acting on an economy of this severity, [it potentially] becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they . . . suffered what was called the 'lost decade.'"
—President Barack Obama, Feb. 9
"The Japanese . . . had eight separate stimulus packages. . . . It was unprecedented. And it didn't work."
—Conservative TV talk show host Sean Hannity, Jan. 23
We argue by analogy. The president says that Japan's history demonstrates the need for his "stimulus package." To the contrary, claim Hannity and other conservatives, Japan shows that stimulus plans don't work. Up to a point, they're both right. But the possible parallels between Japan's experience and our own are much broader and pose the question of whether we, too, might face a "lost decade."
What happened to Japan in the 1990s?
It did not, as some commentators say, suffer a "depression." Not even a "great recession," as others put it. Japan experienced a listless, boring prosperity. Its economy expanded in all but two years (1998 and 1999), although the average annual growth rate was a meager 1.5 percent. Unemployment rose to 5 percent in 2001 from 2.1 percent in 1990. Not good, but hardly a calamity. Japan remained a hugely wealthy society.
Its situation compelled attention mainly because it confounded conventional wisdom. From 1956 to 1973, Japan had grown 9 percent a year; in the 1980s, it was still growing at 4 percent. Japan was widely expected to overtake the United States as the richest, most advanced economy. It didn't. Worse, its semi-stagnation defied the notion that modern economics enabled government to ensure adequate growth.
Papers were written, conferences organized and the verdict rendered: The Japanese had botched it. After the "bubble economy" of the late 1980s burst, the Bank of Japan had eased credit too slowly. Burdened with bad loans, banks stopped lending; government didn't cleanse the banks quickly enough. Government stimulus packages were too little, too late. Naturally, the economy languished. All plausible—and wrong.
The standard analysis reassures, because it suggests that with better decisions Japan might have avoided its prolonged slowdown. The reality seems to be that Japan's economic reverses reflect deeply held social and political values. The same might be true of us.
Japan has what Richard Katz, editor of the Oriental Economist, terms a "dual economy." On the one hand, export industries (autos, steel, electronics) are highly efficient. They face intense global competition. On the other, many domestic industries (food processing, construction, retailing) are inefficient and sheltered from local competition by regulations or custom.
This has suited most Japanese. Exports earned the foreign currency needed to buy food and fuel imports. Meanwhile, protected domestic industries provided the job security and social stability that most Japanese preferred to hyper-competition. While exports thrived, they -- and the supporting business investment—were Japan's engine of economic growth.
The trouble is that this system broke down in the mid-1980s. The rising yen made Japanese exports costlier on world markets. New competitors—South Korea, Taiwan—emerged. Japan lost its engine of growth and hasn't found a new one. That is Japan's central economic problem.
Government has tried. In the 1980s, the Bank of Japan sought to offset the effect of the higher yen with cheap credit. This backfired, resulting in the bubble economy. From 1985 to 1990, Tokyo land prices rose 134 percent; the stock market boomed. Since the bubble's collapse, there have been 13 stimulus plans, reckons economist Randall Jones of the Organization for Economic Cooperation and Development. Even now, the economy is dependent on trade; in December, exports dropped 35 percent from a year earlier, pushing Japan into a deep recession.
What happened in Japan does not doom Obama's stimulus as futile. Sometimes, government should intervene to break the fall of a declining economy. Japan's packages probably temporarily bolstered a faltering economy. In this sense, the president is correct. Unfortunately, his stimulus is weaker than advertised, because much of the effect occurs after 2009.
Still, the operative word is "temporarily." Hannity is correct in that serial stimulus plans become self-defeating. The required debt is unsustainable. At some point, the economy must generate strong growth on its own. Japan's hasn't. Will ours?
Since the early 1980s, American economic growth has depended on a steady rise in consumer spending supported by more debt and increasing asset prices (stocks, homes). Just as the mid-1980s signaled the end of Japan's export-led growth, the present U.S. slump signals the end of upbeat, consumption-led growth. But its legacy is an overbuilt and overemployed consumption sector, from car dealers to malls. The question is whether our system is adaptive enough to create new sources of growth to fill the void left by retreating shoppers.