Japan Offers a Possible Road Map for U.S. Economy
By MARTIN FACKLER
TOKYO — When the Federal Reserve cut its benchmark rate to virtually
zero earlier this week, what was a historic move in Washington seemed
old hat here in Tokyo.
The Bank of Japan kept rates near zero for most of the last decade in
an effort to end a long economic stagnation, and raised them only two
years ago. Many economists say they believe that the zero
interest-rate policy finally worked in Japan after regulators took
aggressive steps that succeeded in restoring faith in Japan's
financial system and Tokyo's ability to oversee it.
Now, with the Fed and President-elect Barack Obama turning to the same
sorts of unconventional policy tools to battle the worst global
economic crisis since the Depression, economists and bankers say they
hope that Japan's lessons are not lost on Washington. They say the
United States needs to take the same kinds of confidence-building
steps, and much more quickly than Japan did.
"Japan had years of trial and error to gets its response right, but
the United States doesn't have that kind of time because markets are
changing so fast," said Akio Makabe, an economics professor at Shinshu
University. "The Fed has to move, and has to move fast, to restore
The Bank of Japan first lowered interest rates to zero in 1999 for a
year and then again in 2001 for five years. The Japanese central bank
was trying to contain a domestic financial crisis not unlike the one
now crippling global markets, in which collapsing real estate and
share prices caused the bankruptcy of large financial companies, like
Yamaichi Securities in 1997.
The central bank's hope was that by lowering borrowing costs to
virtually nil, it could encourage commercial banks to lend more money
to businesses and consumers, rekindling demand.
Economists and former Bank of Japan officials say the biggest lesson
they learned was that cutting rates alone has almost no effect when
the financial system has fallen into a crisis as deep as the one Japan
faced in the 1990s.
Japanese banks simply refused to lend in an environment where
borrowers could suddenly go bankrupt, saddling lenders with huge,
unforeseen losses. The Bank of Japan tried even more extreme measures,
like using its powers to create money to essentially stuff cash into
the nation's commercial banks in hopes they would start lending again.
Exasperated central bankers found that commercial banks just let the
money pile up instead of lending it out.
Economists say the United States faces a similar situation, after the
sudden collapse in September of Lehman Brothers created fears of
additional failures. Economists also fault Washington for its
inconsistency in dealing with the financial crisis, leaving the
impression that it does not have a clear strategy for dealing with
In Japan's case, economists and former bankers say, credit began to
flow freely again only after 2003,
when regulators adopted a tough new policy of auditing banks and
forcing weaker ones to raise new capital or accept a government
takeover. Economists said the audits finally removed paralysis in
credit markets by convincing bankers and investors that sudden
failures were no longer a risk, and that the true extent of problems
at banks and other companies was finally being revealed.
Economists say Washington needs to do something similar to make banks
and financial companies more transparent, and reassure investors that
there were no more collapses like that of Lehman Brothers on the
"The United States needs to do it like Takenaka did," said Anil
Kashyap, a professor of business at the University of Chicago,
referring to Heizo Takenaka, the former banking minister who started
the 2003 audits. "We need someone to come in and give a good
housekeeping seal to banks."
Economists and former central bankers said another lesson from Japan's
experience was the importance of consistency. This became apparent in
2000, they said, during one of the bank's more embarrassing episodes,
when it raised interest rates, and lowered them back to zero a year
later when the economy faltered.
Former Bank of Japan officials said they learned that bankers and
investors would lend in difficult times only if they believed that
rates would stay low for a long period, ensuring them adequate
profits. By raising the possibility of future interest rate increases,
the Bank of Japan dampened enthusiasm for lending, say bankers and
"We learned that zero rates work by building expectations," said Rei
Masunaga, an economist and former director general at the Bank of
Japan. "Zero interest rates take time to be effective."
Copyright 2008 The New York Times Company