As countries around the world deal with the current economic downturn, they could learn valuable lessons from the recession Japan experienced, according to Richard Koo, chief economist of Tokyo-based Nomura Research Institute.

Koo spoke to a Toronto audience on Tuesday about the approach that Japan’s government took in fighting the long-winded recession that plagued its economy between 1990 and 2005. Despite prevalent opinion that the Japanese government largely failed in its efforts to repair its economy, the government in fact prevented the circumstances from being far worse, Koo said.

“I think we did a remarkable job,” he said. “The fiscal policy worked beautifully in this period.”

He pointed to the fact that during the downturn, Japan experienced an 87% collapse in asset prices, yet managed to prevent its level of GDP from falling below its peak during the previous period of rapid growth. Fiscal stimulus was entirely responsible for driving growth in the country’s economy during this period, Koo said.

“Once you realize what we were really up against, then I think you realize that fiscal policy actually worked.”

Koo admitted that the Japanese government also made mistakes in its approach. The policymakers used numerous bouts of short-term fiscal stimulus, which only worked temporarily each time. According to Koo, the government failed to recognize that the downturn was a “balance sheet recession” — one in which private sector companies throughout the economy are entirely focused on paying down debt, and refrain from borrowing and spending money.

“There are no borrowers, because everybody is repairing their balance sheets,” Koo said. “The whole thing contracts very, very quickly.”

The United States is currently facing the same type of recession, with large-scale deleveraging occurring across the country, Koo said. The U.S. government would benefit from recognizing this immediately and implementing the appropriate policy responses.

Specifically, Koo said this type of recession tends to last longer than typical recessions, and short-term stimulus is insufficient. This is one reason the recession in Japan lasted such a long time, he said.

“If we had known in advance that it was this type of recession, and that the economy would not enter self-sustaining growth until private sector balance sheets had been repaired, we would have taken a much longer view of the kind of fiscal stimulus we should have put in,” Koo said.

He does not expect the U.S. recession to last as long as Japan’s, but a recovery could take three to five years, Koo said.

Considering this, the U.S. stimulus measures introduced so far have been too focused on the short-term. He calls for the government to implement spending that extends into the medium-term.

“It’s going to be a multi-year recession, and needs a multi-year response,” he said.

IE