Fears of a global economic slowdown are flaring as the world struggles to put the coronavirus pandemic behind it and jumpstart consumption, bottled up by months of lockdowns and sluggish international trade.
The world does not have to reinvent the wheel when it comes to reviving economies. Japan’s prolonged slump after a bubble burst in the ’90s offers lessons.
The period between roughly 1985 and 1990 was one of unparalleled prosperity in Japan. It was also a gilded age defined by opulence, corruption, extravagance and waste. When the bubble economy ended, Japan entered a prolonged slump from which it has yet to fully recover.
Here are some of the salient lessons from the Japan bubble.
Japan’s decades of experience provide a template for how a society can keep interest rates low. As countries emerge from the covid-19 pandemic, central banks will seek to jumpstart their economies by cutting back interest rates just as Japan did in the ’90s. But this could push countries into a growth stagnation amidst low inflation.
Japan has become the most effective research study of what happens during persistent low inflation and low-interest rates — a situation a lot of countries across the world may face in the aftermath of the covid-19 pandemic.
After the bubble burst, Japan tried to spend its way out of the slump by cutting interest rates to almost zero and injecting liquidity into banks that were struggling to maintain acceptable capital ratios. The Bank of Japan announced negative interest rates in 2016 but even that did not shock the economy back to life. All it did was leave the bond market in a mess. This serves as a cautionary tale for the rest of the world that chronically low-interest rates and huge monetary expansions will not necessarily translate to real economic growth.
Since 1991, Japan has run a fiscal deficit with numerous economic stimulus packages that have had nebulous effects on the economy and contributed to a huge debt burden. This stimulus has pushed the national debt to more than 198 percent of the GDP, which now looks like it will cross the 200-percent mark in 2021.
Many economies are likely to face stagnation post-covid-19, something that Japan has grappled with over the last three decades. Both growth and inflation have remained slumped in Japan since the ’90s, while the main stock market index, the Nikkei, has never risen to its December 1989 peak.
Japan faces a problem with an aging population whose productivity is decreasing relative to other developed nations. In 2019, more than 20 percent of Japan’s population was older than 65 — the highest proportion in the world. By 2030, one in every three people will be 65 or older, and one in five people will be 75-plus years old. This has reduced the labor force and affected production, which could drag down Japan’s growth by 1 percentage point in the next three decades, according to the International Monetary Fund.
Japan’s economic boom between 1985 and 1990 was largely due to cheap loans after the Bank of Japan halved the base interest rate from 5 percent to 2.5 percent and devalued the yen to boost exports to the U.S. But excessive borrowing to buy stocks, land and other assets pushed prices up. It eventually became impossible to repay the trillions of yen in loans and led to a crush.
Japan’s central bank, the Bank of Japan, has pursued decades of conventional monetary policy without much success. Starting in the late 1980s, the BOJ deployed strict Keynesian policy, including more than 15 years of quantitative easing (QE), or the buying of private assets to recapitalize businesses and prop up prices, after the bubble burst.
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In the wake of the burst bubble, Japanese politicians moved to recapitalize struggling banks in hopes that stronger financial institutions would help revamp the economy. It only made things worse. A promise by the finance ministry that it would step in — if capital ratios dropped below a certain target — only made banks cut back on lending.
Learning from the Japan bubble, U.S. policymakers were quick to slash interest rates and bail out financial institutions after the 2008-2009 financial crisis. This helped the economy fully recover by 2013 and avoid a prolonged slump in economic activity.
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