Six Lessons of the "Lost Decade" in Japan

I'm surprised at Mr. Bill Emmott's article about Sen. Hillary Clinton. She said that the U.S. was in a Japanese-like situation, according to WSJ:

Look where we are with monetary policy. Maybe we've had a few little spurts of positive response with the last two cuts by the Fed but I don't think we can work our way out of the problems we're in, in the broad-based economy, with monetary policy alone. I think the Japanese tried that and tried that and tried that and there was just a lot of other challenges that they did not confront until relatively recently.

Thus she denied the effect of monetary policy and recommended the policy to help the foreclosure in communities, which would cost $30 billion. As Mr. Emmott comments, this is the wrong lesson from Japan's lost decade in the 1990s. As I covered the tragedy as a TV producer, I think the true lessons are contrary to her view.

• Lesson One: Monetary policy is the most important measure to avoid Japanese-like situation. It isn't limited to interest rates and money supply but the disposal of failed banks and debtors. The Ministry of Finance (MOF) ordered banks to hide their failure to put off the clearing of bad loans. So banks continued window dressing supported by the MOF.
  
  
• Lesson Two: If you can't avoid the failure, the sooner, the better. In 1992, I produced a TV program "Bad Loans of 12 Trillion Yen ($120 billion)". It was the official amount of gross bad loans in 1992. However, since the MOF didn't dispose the loan then, the land price collapsed and the net bad loan became so huge as 100 trillion yen in 2003, according to the Financial Services Agency.
  
  
• Lesson Three: The central bank should ease money promptly after the crash. Since the Bank of Japan (BOJ) failed to stop the bubble, it didn't change the very tight monetary policy after the bubble burst in January 1990. After July 1991, when the BOJ eased the monetary policy, they were too cautious because they were afraid of the second bubble. As a result, the prices of real estates and stocks fell to less than 1/5 of their peak.
  
  
• Lesson Four: Fiscal policy isn't effective: Japanese government repeated trying to rescue the economy by "emergency fiscal stimulus", which resulted only as the vast amount of government deficit, 180% of GDP. As many banks and companies were insolvent, the money supplied by the government was used to make up zombie banks and companies who looked alive but in fact dead.
  
  
• Lesson Five: Until the focus of disease is removed by surgery, no macroeconomic medicine will be effective. In 2002, an economist Heizo Takenaka became the Minister in charge of Economy and Finance. He changed the "soft landing policy" of predecessors and said "I don't think there are too big banks to fail" in an interview with Newsweek. It aroused a panic among bankers, so they stopped postponing the disposal of bad loans.
  
  
• Lesson Six: The interest rate isn't very effective under deflation, but money supply can help the restructuring. The BOJ made the interest rate zero in 1999, which didn't improve the crisis, because the real interest rate was high under deflation. Since 2001, the BOJ began the "quantitative easing" policy that supplied huge amount of money, which lessened the pain of the surgery by banks and companies to restructure themselves.

Summing up, it's an absurd policy to rescue debtors by the government. It would only put off the crisis and make the clearing of loans difficult. The FRB's current policy is not so effective, but nobody can cure such a huge crisis in a few months.

I don't think current crisis would last into a decade, as Japan experienced, because the FRB encouraged banks to disclose their loss, instead of the MOF who continued to cover up the crisis. The failure of Bear-Stearns is similar to that of Yamaichi Shoken, of which the president cried in the press conference in November 1997. Even Japan got out of the bottom in 2003, so the FRB could manage the crisis in a year or so.

Do you think I'm too optimistic? I hope American consumers will become optimistic, too. As Keynes and Hayek agreed, the essential problem of the Great Depression was the pessimism of firms and consumers under the great uncertainty. So it's good that Sen. Clinton is optimistic unless she becomes the candidate.