Japan’s lost decade

Economists note some similarities between Japan’s decade-long battle against recession and deflation with current conditions in the U.S., but most of them highlight key differences that could result in a faster recovery in the U.S.

In the late 1980s, Japan experienced bubble-like growth in both its real estate and stock markets.

“Businesses owned a lot of real estate,” says James Pressler, associate economist at Northern Trust Co. “They used leverage to buy it, and leveraged it out to [finance additional] purchases.”

The Nikkei 225 Index averaged 30- percent annual gains throughout the late 1980s and hit an all-time high of 38,915.87 on Dec. 29, 1989. The index has never returned anywhere near that level. In late January, the Nikkei 225 closed just above 8,000 — roughly 18 percent of its all time peak.

By April 1992, Japan had officially entered the first of three recessions that plagued the economy for the next decade.

“Banks were getting overloaded with a lot of bad loans — upside-down financing,” Pressler says. “They mortgaged the future of their miracle.”

The Japanese effective overnight lending rate, which at the time was market driven, actually continued higher even after the downturn in the Nikkei. That rate ended 1989 at 6.65 percent, Pressler says, but even after the Nikkei began to plunge, it was still rising and ended 1990 at 8.34 percent. The Nikkei 225 lost 38.7 percent in 1990. From there, interest rates began a slow fall.

“It took five years for the overnight rate to go from above 8 percent to .50 percent in 1995,” Pressler says.

That is a stark contrast to the swift monetary easing by the U.S. Federal Reserve. At the beginning of 2008, the U.S. federal funds rate stood at 4.25 percent. January of that year brought a surprise inter-meeting rate cut of .75 basis points and the Fed acted aggressively and unconventionally throughout the year, ending with a Dec. 16, 2008 cut to zero.