One of the apparent fears of the Federal Reserve is that the U.S. economy today will be like the Japanese economy of the 1990s. What are the parallels, and what are the problems of copying the Japanese economy of 20 years ago? Dr. Mike Walden, an Extension economist with N.C. State University, responds:
“Well … the Japanese economy throughout the decade of the ’90s really went through a horrible recession. They virtually had no economic growth in that entire decade. And if you overlay the parallels between our economy now in the last couple of years and the Japanese economy in the 1990s, they are rather eerie in the sense that we had a real estate bust that many people know led us into this recession. Japan had a real estate bust in the early 1990s that lead them into their recession. We saw, have seen and continue to see a big reduction in the inflation rate Japan had that also. And where Japan headed was to a series of years where they had deflation — prices going down. Now the problem with that is consumers thought, ‘Hey, if prices are going down, I’m going to wait to spend so consumer spending fell.’ Thereby businesses didn’t sell as much. They laid off workers, which meant less income for consumers to have to spend. They spent even less. So it was a downward spiral.
“And I really think this is what’s behind the Federal Reserve’s decision to pump a lot of additional money into the economy. They really want to head off a deflationary cycle, which they think is really what caused Japan to slide in the 1990s.”