Will the U.S. and Europe avoid a lost decade? Lessons from Japan's postcrisis experience

Abstract

This paper reexamines Japanese policy choices during its banking crisis in the 1990s and draws some lessons relevant for the United States and Europe in the aftermath of the global financial crisis of 2007-09. The paper focuses on two aspects of postcrisis economic policy of Japan: the delay in bank recapitalization and the lack of structural reforms. These two policy shortcomings retarded Japan's recovery from the crisis and were responsible for its stagnant postcrisis growth. The paper also suggests some political economy factors that contributed to the Japanese policies. In France, Italy, and Spain bank recapitalization has been delayed and the structural reforms have been slow. Without drastic changes, they are likely to follow Japan's path to long economic stagnation. The situation in Germany looks somewhat better mainly because the structural reform was undertaken before the crisis. Although the recovery has been slow in the United States as well, the problems are at least different from those faced by Japan then and many European countries now.