CIAO DATE: 07/2008
January 2008
American Enterprise Institute for Public Policy Research
Japan experienced a disastrous decade of economic stagnation and deflation from 1991 to 2001 after bubbles in its stock market and land market collapsed. While some economic pain was unavoidable--given a 60 percent plunge in equity prices between late 1989 and August 1992, accompanied by the onset of what ultimately became a 70 percent drop in land values by 2001--the "lost decade" was not an inevitable outcome. It required a series of persistently wrong economic policy decisions that ignored the lessons learned in America's Great Depression of the 1930s and the subsequent research on the causes of that painful period.
Japan's experience in its lost decade and, indeed, during the new millennium carries with it lessons for U.S. policymakers today after the collapse of America's highly leveraged housing bubble that has already seen prices drop by more than 10 percent from their 2006 peak, with indications of another 10 to 15 percent fall. America's stock market is about 15 percent below its October 2007 peak, suggesting that investors are currently expecting a mild U.S. recession. More ominously, however, credit markets have largely ceased to function, save for the highest quality loans, suggesting that a sharp reduction in the quantity of credit available at market-clearing interest rates is threatening to curtail real economic activity by more than the seemingly benign level of market interest rates would suggest.
Resource link: Japan's Lost Decade: Lessons for the United States in 2008 [PDF] - 90K