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Japan's Lost Decade: Lessons for Iceland

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en

After World War II Japanese society went through substantial political, social and economic reform. Change in economic management generated growth and prosperity. Both gross national product and gross domestic product rose considerably in a brief period of time. The yen appreciated, public savings increased and both domestic and foreign investment advanced. In the 1980s the Nikkei 225 stock index surged and reached its peak just before the break of the decade. Real estate prices escalated likewise and property prices in Japan were the highest in the world at the time. These asset price bubbles had become unsustainable and Japanese authorities, recognizing this, raised policy rates. This immediately shattered the price bubbles, sending the Japanese economy into a deep recession of prolonged economic stagnation. Banks and businesses took most of the heat, losing their equity shares and experiencing devaluation of their creditors’ mortgages. Non-financial corporation struggled to meet their loan installments, leaving banks and lending institutions with massive accumulation of non-performing loans.
In the wake of this economic collapse, Japanese authorities seemed indifferent, showing reluctance to take any real action. When they were forced to deal with the dire situation at hand, their policies were somewhat hesitant and insufficient.
Through numerous fiscal stimulus packages and capital injections into bad off banks and financial institutions in the 1990’s by the Japanese government, the economy gradually started showing signs of recovery. Japanese authorities financed their rescue operations by borrowing enormous amounts of money, leaving Japan one of the heaviest indebted countries in the world. The decade long economic depression in Japan has become to be known as “the Lost Decade”, describing both stagnation in the economy and loss of opportunity.
Iceland is currently faced with a situation not unlike the one Japan was in some 20 years ago. The Icelandic authorities seem to take after their Japanese counterparts in their initial reactions, seemingly lacking earnest strategies to mend the ailing economy.
Although the situation in Iceland is not entirely the same as in Japan in the 1990’s there must be some lessons to be learned from Japan’s Lost Decade to prevent the Icelandic economy from heading down that same road.

Birting
10.5.2010


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