Japan had a recession in the 1990s that was very similar to our current one. So far, the actions we’ve taken have mirrored Japan’s, which only further damaged their dire situation. I know. It’s shocking that these liberal ideas, designed to help, almost always backfire.
With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker “zombie businesses.”
First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.
Second mistake. With all those loans, the Japanese government was simply too integrated into the market to have adequate incentives to create the right policies. Daniel Okimoto, former director of the Asia-Pacific Research Center, points out that the interests of Japan’s economic bureaucracies, such as the Ministry of Finance, became interdependent with the banking industry. Moreover, government officials suppressed data revealing the intense scope of the economic malaise, all while regulations were developed with government interests in mind. Transparency and public accountability were basically nonexistent.
Fourth mistake. Japan tried to climb out of its economic mess by raising taxes and cutting interest rates. Okimoto cites a series of policy mistakes in a report on Japan’s economic stagnation that includes a consumption tax hike, business taxes, and heavy-handed reliance on interest rate cuts that reduced investment incentives.
Eerily, and obviously, given the missing “third mistake,” there’s lots more.