The 'Japanese Experience'
You hear a lot about the "Japanese experience" these days. This does not, as you might hope, refer to reasonable portions of fish and extremely small electronics. This is the grim path out of the financial crisis. Economists talk about it the way your doctor talks about heart disease. It means slow growth and stagnant incomes. A loss of international prestige and a drop in consumer confidence. But economists tend to invoke the condition a bit more often than they tend to explain its component parts. It's generally just the Thing That Will Happen unless the speaker's specific policy solutions are followed.
James Surowiecki did some useful digging, however, and came back with a couple papers explaining what exactly made the Japanese experience so unpleasant. The specific culprit appears -- at least in the eyes of some -- to have been a practice called "evergreening": Japan's weak banks "kept extending additional credit to companies that already had loans with them. By extending credit, the banks enabled weak corporate borrowers to keep making their interest payments, and to put off bankruptcy." And so the economy was populated by dying, unproductive companies. The banking system was weakened because it kept indulging borrowers who could never pay it back. Some estimates suggest that 30 percent of Japan's publicly-traded firms were on bank-provided life support in 2000.
So we shouldn't do that. But I'm always struck by a sort of contrary thought in these conversations: If Japan's experience is the nightmare scenario, then that's actually pretty good. Not "good" as in preferable, but "good" as in "not Argentina." Japan might have underperformed in the 90s, but it was hardly a Mad Max-style dystopia.
Photo used under a CC license from Flickr user Reggae Dori.
May 18, 2009; 9:00 AM ET
Categories: Financial Crisis
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