The United States and European countries can take steps to avoid making the same economic mistakes that Japan committed during the latter's "lost decade," writes Stanford economist, Takeo Hoshi in a new paper.
The study, published in the IMF Economic Review , describes the reasons Japan was not able to pull out of its long recession in the 1990s, offering some lessons for the US and European leaders in the wake of the 2007-09 meltdown.
In particular, the delay in bank recapitalisation and the lack of structural reforms in the economic sphere kept Japan from realising a full recovery, wrote Takeo Hoshi, the Henri and Tomoye Takahashi senior fellow at Stanford's Freeman Spogli Institute for International Studies.
"Bank recapitalisation" refers to a governmental reorganisation of failing banks, often involving the use of public money to keep them solvent. "Structural reforms" describes how a government might overhaul its economic structures to increase business competition – such as deregulation to cut costs for firms.
The shortcomings in these two policy areas "retarded Japan's recovery from the crisis and were responsible for its stagnant post-crisis growth," said Hoshi, whose co-author was Anil K Kashyap, an economics professor at the University of Chicago Booth School of Business.
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