Avoiding Japan's "lost decade"

U.S. can learn from Japan's deflated economy in the 1990s

Excerpt:

Then, as now, asset values rose to stratospheric heights. Then, as now, the bubble eventually popped. And then, as now, people initially believed the economy would soon regain its bearings.

But in post-bubble Japan, the economy didn't recover as expected. Instead, it stagnated — year after painful year — until the 1990s had earned the chilling sobriquet "the lost decade."

Now, as official Washington mobilizes to head off a possible recession, lessons from Japan's brush with prolonged economic misery are being revisited. They may offer a guidepost for everything from Federal Reserve Chairman Ben Bernanke's handling of interest rates to lawmakers' calls to jump-start a moribund economy with tax cuts or social spending.
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The scale of Japan's 1980s boom and subsequent bust was breathtaking. In the five years before its 1989 peak, the Nikkei stock average rose 275%. Property prices became so inflated that the tiny spit of land surrounding the Imperial Palace in central Tokyo was briefly worth more than the entire state of California. At the time, Japan's seemingly unstoppable rise inflamed fears among Americans that the United States had slipped into permanent economic inferiority.

When the bubble finally popped in late 1989, stock and property prices nose-dived in tandem. In less than three years, the Nikkei stock average fell 63% from its peak of 38,916. It didn't hit bottom until April 2003 and a total decline of 80%. At Monday's close of 13,326, it remains a fraction of its record high.

Comment: Japan's economic experience explains the Fed's dramatic rate cut and the bi-partisan support for an economic stimulus package!