Japan and the U.S.: Looking More and More the Same
Prepared for Symposium on Building the Financial System of the 21st Century: An Agenda for
Japan and the United States, Armonk, New York, October 23-25, 2009
Thomas F. Cargill
Professor of Economics
University of Nevada, Reno
Reno, NV 89557-0207
775-849-1588
tcargill1588@charter.net
Draft: September 28, 2009
Introduction: U.S. financial and economic distress commenced with the collapse of
residential real estate prices in late 2006 then intensified with the shift from expansion to
contraction in the real economy December 2007 and finally reached financial crises levels in
September 2008. These events rekindled memories of Japan’s “decade and a half” of economic
and financial distress from 1990 to 2005 and raise the question of what each country can learn
from the other’s experience. The common elements are numerous: deregulation of the financial
system; asset bubbles; monetary and fiscal policy errors; lax regulatory standards; government
credit allocation policy; and, government response to distress rooted in forgiveness, forbearance
and “Too Big to Fail” (TBTF) policy.
The important question is whether these and other common elements suggest the U.S.
will repeat Japan’s experience. The September 2008 crisis is over, but the financial and real
sectors exhibit continued distress. It is far too early to project the course of economic and
financial events in the U.S.; however, this paper argues the similarities are far more important
than recognized and the U.S. could easily fall into a long-period of stagnation.
Posen (2003) writing before the collapse of real estate prices argued that despite the
evolving real estate bubble in the U.S., “it takes more than a bubble to become Japan”. Posen
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argued there were so many structural and policy differences between the two countries that Japan
offers few lessons. More recently, Katz (2009) argued the same point. According to Katz, the
more structurally sound U.S. financial