Hugh Patrick Director of Center on Japanese Economy and Business at Columbia Business School
Japanese policymakers made two big mistakes and one smart move during Japan's "lost decade" in the '90s, and the financial crisis of 1997-98.
First, they responded slowly to the crisis, even as their economy worsened. American policymakers have learned from that, and accomplished in months what Japan took years to do. And the U.S. should continue to move intuitively, with a sense of urgency.
Second, Japan's attempt at fiscal stimulus seemed bold at the time, but turned out to be too little, too late, too ad hoc, too uncertain. When stimulus started working in 1995-96, the government reversed it in early
1997 with huge tax increases and expenditure cuts.
US fiscal stimulus today is bold, but almost certainly just the first step. The lesson from Japan is that fiscal stimulus will have to persist until American confidence is restored and recovery is well underway. Tax
increases, necessary in the long run, should not be imposed until it is clear that private domestic demand can sustain full employment and continuing growth.
Third, from 1998 on, Japan handled its banking crisis increasingly well. The government injected capital into almost all of the large banks in terms reasonably good for taxpayers; required banks to provide and carry out
detailed business plans to restore profitability; and engaged in strict supervision, particularly in forcing the banks to resolve their huge bad loan problems.
The US must do the same. In Japan, two long-term credit banks were nationalized, their bad debts substantially written off, and then were resold to private investors. If the US decides to take over any banks, the Japanese experience provides one working model. The specifics will differ, the Japanese success in finally restructuring banks in the late 90s provides sound lessons for the US to think about.
Editor's Note: Hugh Patrick is also the Robert D. Calkins Professor Emeritus of International Business at Columbia Business School.
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