Avoid Japan's Mistakes

The Washington Times (Washington, DC), March 8, 2009 | Go to article overview

Avoid Japan's Mistakes


Byline: Benjamin Powell, SPECIAL TO THE WASHINGTON TIMES

Those who think the $787 billion stimulus bill will chase the blues from the economy should look at Japan's experience in the 1990s, where a succession of interest-rate cuts and Keynesian spending initiatives did little but prolong the downturn. The result was a decade of lost growth.

The United States is facing a financial crisis remarkably similar to the one that struck Japan. We would be wise not to repeat the same mistakes. In both cases, low interest rates helped fuel a financial bubble and inflate stock and real estate prices. The bubbles eventually burst, pummeling stock and real-estate values.

So far the magnitude of the U.S. recession pales in comparison to Japan's. Japan's real estate prices plummeted nearly 80 percent from 1991 to 1998. The Nikkei stock market index fell approximately 70 percent. Much of the contraction occurred in the years following the initial crisis as one government initiative after another failed to revive the economy.

Japan tried decreasing interest rates, bailing out and nationalizing banks, and enacting multiple fiscal stimulus packages. Nothing worked; and there's nothing to indicate similar measures will work better today.

The Japanese adopted fiscal stimulus bills early in the crisis. Between 1992 and 1995 the Japanese passed six different stimulus packages totaling 65 trillion yen. The average yearly stimulus amounted to a little more than 3 percent of the total Japanese gross domestic product (GDP). The nearly $800 billion U.S. stimulus bill amounts to about 6 percent of GDP.

Yet bigger is not better. In 1998, Japan's stimulus effort amounted to about 8.5 percent of GDP. The results were negligible.

The Japanese were a little slower to cut interest rates. By the mid-1990s, however, the official discount rate, or the rate at which financial institutions borrow from the central bank, was down to 0.5 percent. It reached zero a few years later. The U.S. Federal Reserve has been quicker to act. The federal funds rate - the rate at which banks lend to other banks - already is down to near zero percent. But the results are the same: nada.

Washington already has approved $700 billion to bail out ailing banks - and the administration is getting ready to ask for more. …

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