Learn economic lessons from Japan

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By Kim Holmes

ANALYSIS:

A government repeatedly lowers lending rates, develops a cozy relationship with banks, and tolerates the hiding of bad loans.

A real estate bubble collapses, and banks start to buckle.

Everyone panics and government bails out the banks, spends massively on public projects, and raises taxes to pay for the new spending.

The U.S. today? No, Japan in the 1990s.

Tokyo's mishandling of the economic crisis led to long-term stagnation, from which Japan has yet to recover, and to the loss of its place as a global economic leader. This - or worse - could be America's fate if we get our reaction to the current crisis wrong.

While there is a veritable cottage industry of economists debating the causes and meaning of Japan's "lost decade," one thing is clear: It lasted much longer than it should have.

From 1976 to 1991, Japan's gross domestic product (GDP) increased at an average annual rate of 6.5 percent. But from 1992 to 2007, it averaged only 0.6 percent per year.

There are many differences between Japan's and America's economic crises, but there are also several applicable lessons that we can take from Tokyo's experience.

• First, allow the market to clear. Bailouts, subsidies and other rescue packages may ameliorate the problem in the short term, but slow economic recovery in the long run.