February 20th, 2009
11:48 AM ET

Three lessons from Japan's economic meltdown

[cnn-photo-caption image=http://i2.cdn.turner.com/cnn/2009/images/02/20/art.market.anon.jpg] 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.

Filed under: Economy • Finance
soundoff (8 Responses)
  1. Annie Kate

    Seems that every commenter has their own take on what will fix our economy. I'm surprised now that Obama was able to get enough votes to pass his stimulus bill – with as many differing opinions as there are on this blog just think of all the differing opinions there must be in Congress. Hopefully, what Congress and Obama are doing will work. I'm going to try to stay positive until I see a real reason not to be.

    February 20, 2009 at 5:28 pm |
  2. GF, Los Angeles

    Well CA has decided to increase taxes to balance our $42 billion deficit budget – for me personally it's an additional $272 a year – doesn't sound like much for a single person but imagine families who on average will have to pay an additional $1,400 a year. One business owner called into KFI saying he will pay an additional $38,000 a year because of the fleet of vehicles he owns (the tax doubles the license tax). How is that going to solve anything? The businesses will have to lay off workers to make up the tax or move out of the state entirely. Get real America. Higher taxes is not the answer. Cut the fat starting with the illegals.

    February 20, 2009 at 2:49 pm |
  3. Barbara Murray

    I think lowering prices would stimulate the economy, especially at the grocery store. People are struggling just to put food on the table and the price of utilities is obsene. The banks charge excessive fees on almost everything and people are pulling their money out of the banks. I wonder how walmart can charge $3 to cash a check and give you the cash right away and the bank wants to charge you $10 and sometimes hold your money for a week. Walmart also only charges $3 for their money card. People are running as fast as they can from the banks trying to hold on to whatever they have and if the banks dont wake up it is not going to matter how much work the government does to save them it is the people who are going to make that decision.

    February 20, 2009 at 1:16 pm |
  4. Mac, Houston

    As far as the Banks go, doesn't the Government already own Freddie and Fanny? Why don't they just go buy all the toxic loans from Private Banks to clean up their balance sheets?
    Would that work?

    February 20, 2009 at 12:21 pm |
  5. Mari, Salt Lake City

    Wonderful article, Mr. Patrick. I only wish that the media (CNN) would take time to educate the American public, with educational segments on the economy each and every night. There IS a lot of misinformation out there!

    For example, this morning a friend called saying that she is angry that "people who have been irresponsible not paying their mortgage, and buying homes too expansive for them to afford would be getting a bail out!" Wrong. The home owners that will be helped are those whose records show have been current on their mortgage payments, and because they LOST their jobs, are in danger of losing their homes!

    The far-right is doing what it always does, crying "socialism, socialism!" In the 50's & 60's it was the "communists are coming!" However the GOP offers no solution, nor to do want to help or cooperate with the new president who has .... inherited... this disaster!

    Thankfully, Americans, are not as dumb as the GOP thinks we are. We are watching closely their obstructionist politics. The GOP's approval rating is 19%, which should speak loud and clear to its leadership.

    What I want to know from the conservatives is:

    WHERE were your so-called-fiscal-conservatives when Bush was doubling our National debt and spending our Nation into bankruptcy?

    The Bush Economic Disaster will not be solved overnight, its complex, it will cause a lot of pain. Sadly, the GOP has been hijacked by the haters like, Limbaugh, who will condemn any Republican politician who dares to work with or cooperate with President Obama. What the GOP does not get, is that IF Obama fails........ so does our Nation, and America will blame the GOP for being bull-headed obstructionists.

    February 20, 2009 at 11:37 am |
  6. meenas17

    Japan teaches a bitter lesson in a hard way. Act at once. Make sure the stimulus package is sufficient.. Shred off the unnecessary arrears of banks and work on their upliftment. .Let the stimulus be around till the economy revives.Then slowly withdraw the rescue advantage.

    February 20, 2009 at 11:31 am |
  7. Michael C. McHugh

    I would use the Federal Reserve to provide a massive stimulus to get us out of this abyss. It can send funds directly to state and local governments facing bankruptcy, for example. What California just did, raising taxes and cutting the budget, is the exact opposite of the Keynesian, expansionary policies we need. The Federal Reserve could also inject more money into Fannie, Freddie, various nationalized banks, to help consumers get out from their crushing debts–and not just mortgages.

    I do agree that some of the big banks will have to be nationalized and run as public services. Think of them in the same category as federal highways or national parks. They will no longer be for-profit institutions but public ones we can use to lower debts and stimulate the economy. Obviously, we just have to write off all the fake and toxic assets. If they had any value at all, capitalists would be ling up to by them, and that is definitely not the case.

    I also think that now is the time to fix Social Security and Medicare, by direct infusion of Federal reserve funds. The last thing we want to do today is raise payroll taxes, and the Republicans are probably be right that it would be better to lower them. Of course, many people suspect them of ulterior motives when it comes to Social Security and Medicare....

    Finally, I think we have to look at some major reforms of global institutions like the IMF and World Bank, to help ourselves and many other countries get out from under this crushing debt burden. It also goes without saying that the poorer countries of the Global South will need a real say in how these organizations are run–it has to be a system that meets their needs, not simply one that imposes austerity programs on countries already living in austerity. Once again, austerity policies are the absolute last thing we need in a crisis like this.

    February 20, 2009 at 10:20 am |
  8. Michael "C" Lorton, Virginia

    Either way you slice the economic pie---a tax increase is inevitable-–it is a central dogma for America-–when times get tough--stimulate the economy with money that we don't have--and once it has improved--–raise taxes--and you don't have to have a Phd to see that.

    February 20, 2009 at 10:13 am |