The notion that the U.S. recession will turn us into Japan emerged immediately after the September 2008 bankruptcy of Lehman Brothers, and has proved to be one stubborn meme. You might think that the actual growth of the U.S. economy over the last four quarters would dampen the Japan talk, but you would be wrong. The anticipation of a double-dip recession, the persistence of high unemployment, and the overhyped deflation fears have resuscitated the Japan monster like yet one more Godzilla remake.
It’s tiresome to have to say it, but the Japan comparison is very weak. Until the economy really feels like it’s recovered, however, there will always be pundits—even respectable pundits—who find it useful to wave that flag, and a few slender bits of evidence that make it just plausible enough.
These days, how you use the Japan argument is really a proxy for what you believe about fiscal stimulus. Thus, the fear-Japan crowd splits into two basic camps: There are those who point to the Japanese experience to argue that stimulus by definition does not work—or is not worth the level of government debt that it creates. (This camp includes the Reason Foundation and just about any opinion published in the Wall Street Journal.) And there are those who think that we need to fear the Japanese scenario because Japan’s stimulus was too little, too late. (Paul Krugman leads this camp.) It’s almost comical to have advocates of two completely opposed financial strategies pointing to the same fearful scenario and saying, “We’d better not let that happen!”
The trouble is that the specter of a Japanese-style “lost decade” is so fraught with fear and nationalistic pride that it blots out genuine analysis. While the Japanese economic crisis that began in 1990 might resemble the U.S. recession in some superficial ways, it’s remarkable how different the underlying situations actually were. For example:
The size of the bubble and the size of the pop. In a seminal 2009 Foreign Affairs refutation of the Japan analogy(subscription required), Richard Katz pointed out that between 1981 and 1991, commercial land prices in Japan’s six largest cities rose 500 percent. By comparison, U.S. housing prices in the 20 largest cities between 1996 and 2006 rose 200 percent—still a bubble that had to burst, but with less severe consequences. Even if housing prices continue to fall, we have a long way to go before prices dip below where they were in 1996, whereas in Japan prices sunk for years well beneath where they had been in 1981.
The strength of corporations. Stimulus skeptics tend to be evangelists of private-sector virtue, yet they spend very little time discussing just how healthy the balance sheets of American corporations are. Yes, America’s financial and auto sectors fell into near-death, but nonfinancial corporations have been delivering healthy, even record profits lately, and are not carrying much more debt than they ever have. (It would be helpful if they could create some high-paying jobs, but that’s another story.) By contrast, Japanese companies in the ‘90s were so burdened with debt that their failure en masse to pay back loans created a massive, lengthy drain on the economy.
Timing of government intervention. Everyone—including those of us who reject the Japan analogy—can agree that the Japanese government and central bank prolonged its malaise by unfathomable delays in policy response. The famous move to a zero-interest rate did not, for example, kick in until about nine years into the crisis; the Federal Reserve and U.S. government acted much more swiftly. When Barack Obama makes his uphill pitch about how things could have been worse without the bank bailout or stimulus, it’s precisely a Japan scenario he’s talking about.
So if the Japan analogy is so flawed, then why does it keep popping up? Fear is part of the explanation; Japan’s lost decade is close enough in Americans’ memories that it can be used as alarmist shorthand more readily than other historic economic meltdowns (even more readily than the Great Depression, about which one hears relatively little these days). Similarly, as noted above, the “lost decade” is a proxy for an argument about stimulus, all the more ferocious for the fact that everyone knows the idea of a second stimulus effort is politically dead.
But even allowing for emotion and politics, there are aspects of Japan’s experience that are instructive, some middle ground in the are-we-or-aren’t-we-Japan debate. Fiscal stimulus can indeed be ineffective, under at least three conditions: if it comes too late in an economic slowdown, if it is not coordinated with monetary policy, and if it is too small. Japan probably suffered from all three conditions; with the current U.S. stimulus, we should still be concerned about the third.
Another question is: Have America’s banks really cleaned out their drawers—and did they use bleach and rubber gloves? In Japan’s crisis, government actions may have been weak or even harmful, but bank behavior was truly unconscionable: They were poorly capitalized, they had fabulist bookkeeping practices, and they carried a gigantic number of bad loans. Few would argue that American banks are quite that bad, but despite the bailout and many impressive earnings announcements, some economists are concerned that the rate of nonperforming loans is still rising, and that banks have still not come clean about how toxic their holdings are. The fact that the fear-of-Japan crowd almost never leads with this legitimate concern is a sad and telling indication of just how politicized the arguments about Japan are.
Research assistance by Rachel Louise Ensign.