US Still at Risk for Japanese-style Lost Decade
U.S. policy-makers have taken bold steps to correct the credit crisis, including injecting capital directly into U.S. banks, but it may not be enough to avoid prolonged stagnation similar to Japan’s so-called “lost decade,” according to Standard & Poor’s Ratings Services.
The bursting of Japan’s economic bubble in 1992 took 12 years to solve, due to a combination of inadequate early action to shore up Japanese banks’ capital and prolonged economic weakness that kept the bad loans coming. The following chart shows the frustrating persistence of Japan’s real estate weakness.
S&P’s Naoko Nemoto writes in “Japan’s Lost Decade Offers Lessons for Current Global Turmoil” that governments in the current crisis so far have taken broader and faster action than the Japanese government did in the 1990s, which is clearly a good thing. But the underlying housing and industrial problems remain.
Given that the current financial crisis is having a bigger impact on economic activities over a wider geographical area, governments need to take more drastic corrective action to boost economic growth and stabilize the financial system than Japan did.
In “How Today’s Turmoil Will Shape Tomorrow’s Markets,” S & P points out that while U.S. policymakers understand Japan’s mistakes of the early 1990s, that doesn’t mean they know what steps are the correct ones to avoid years of stagnation.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
