Japan’s ‘lost decade’ pushes U.S.

The collapse of a real-estate bubble, bad loans that sap the financial system, evaporating growth — a series of events has led the U.S. economy to a decline in consumer prices — eerily resembles Japan’s crisis in the 1990s.

The situation is quite familiar to Federal Reserve chairman Ben Bernanke, an expert on Japanese deflation.

Bernanke oversaw the rapid reduction of the Fed’s key interest rate, taking it from 5.25 percent to 1.0 percent in little more than a year, in response to the global financial crisis that erupted in August 2007.

By contrast, the Bank of Japan raised its key rate in the early 1990s at the start of the country’s crisis, before letting it slide to nearly zero after 1995.

The U.S. central bank, in addition to lowering rates, has wielded an array of so-called “nonconventional” tools to support the credit markets, including cash injections, massive loans to financial firms and direct purchase of private debt.

“The Fed has been more proactive. The Bank of Japan used the nonconventional tools only after lowering its interest rate to nearly zero,” Takeo Hoshi, an economics professor at the University of California, San Diego, told AFP.

The Fed dramatically bulked up its monetary base which it directly controls — its own money and the reserves of banks. Since mid-September, the coffers have grown 63 percent.

In Japan, the monetary base of the central bank increased only 17 percent in five years, between 1990 and 1995.

Still, credit remains choked in the U.S. financial system as banks hunker down amid the worst financial crisis since the 1930s Great Depression.

“Monetarist Bernanke and others blame Japan’s post-bubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think,” Hong Kong equities strategist Christopher Wood, who wrote a book on the Japanese real-estate bubble, says in a Wall Street Journal opinion article.

Lowering rates and flooding cash into the financial system pose inflationary risks, Hoshi says.

“In 2003, when it lowered its rates to fight against deflation, the Fed has been too successful in a way. Many criticize this policy for creating bubbles,” the California professor said.

Hoshi noted that a “too cautious” Japan had unleashed “years of stagnation.”

“The error is possible on both sides. The Bank of Japan had committed the error of being too conservative. The Fed may have committed the error of being too liberal, too agressive. It’s very difficult to balance both risks,” he said.

Furthermore, the U.S. effort is focused for the moment on finance.

In a recent study on Japanese deflation, ratings agency Standard & Poor’s explained that “the U.S. government does not seem to have a specific strategy to recapitalize troubled companies, such as the major automakers.

“And lessons learned from the Japanese experience suggest that it is vital to support industrial corporate entities as well as bailing out financial institutions.”

The U.S. actions threaten to undermine the dollar, which could flood the market when banks decide to resume lending.

“Such actions will not solve the problem but will merely compound it, by adding debt to debt,” Wood warned.

The U.S. government has been forced into deeper debt to finance the fight against the credit turmoil. The ballooning U.S. debt is often criticized as a source of instability in the global economy.

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