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Lessons from Japan’s ‘Lost Decade’


America’s economic policymakers should remember what Tokyo did wrong.

In a new report, American Enterprise Institute visiting scholar John H. Makin discusses Japan’s “disastrous decade of economic stagnation and deflation from 1991 to 2001,” which became known as the “lost decade,” and explains what lessons U.S. policymakers should draw from it. In Japan, the lost decade followed a massive asset price collapse. In the United States, the fear is that a severe housing slump and credit crunch will trigger a recession.

“A detailed examination of Japan’s lost decade may lead some to conclude that America’s current problems are not that serious,” Makin writes. “The lessons for American policymakers in 2008, however, are clear, and it would be unwise to ignore them. An economic cycle driven by a collapse in the market for an asset—such as land or housing—to which the banking system is heavily exposed is a dangerous beast. One lesson that we shall probably be learning this year is that conventional measures like prompt policy interest rate reductions by the central bank and some fiscal relief for households and firms are necessary but not sufficient conditions to return the economy to health.”

Here are two other lessons from Japan: “do not allow deflation to take hold,” and “avoid the temptation to raise taxes in the midst of a rapid economic slowdown driven by deteriorating credit conditions.”

Read the whole thing.