The global economy seems destined to repeat the “lost decade” that Japan endured after the collapse of its bubble economy two decades ago, experts argued on Tuesday.
Governments will need to do things “the Japanese way,” nursing banking systems slowly back to health and going deeper into debt if global GDP is not to implode, they said in Istanbul.
Green shoots of recovery that have appeared in some advanced economies “do not guarantee continuing recovery,” argued Anoop Singh, director of the IMF’s Asia Pacific Department. “If Japan’s experience in the 1990s is anything to go by, we are still in the very early stages of economic recovery,” he said.
Japan saw “green shoots” of recovery in several episodes of apparent economic improvement recovery during its post-bubble recession, James Gordon, IMF Asia Pacific Department adviser, agreed. Each time, the “green shoots” withered, after policymakers overestimated their strength, he said.
Japan had at least two such false dawns in the 1990s before lasting recovery set in from 2003 on, Singh said. Attempts to withdraw fiscal and monetary stimulus led to a plunge back into recession, while banking system damage took many years to remedy. He saw strong parallels with the global economy now.
This highly cautious tone was echoed by IMF managing director Dominque Strauss-Kahn. “The crisis is not over and recovery will be sluggish,” he emphasised in his speech at the opening plenary session of the annual meeting.
“Private demand is not yet self-sustaining,” he said. “The spectre of deleveraging will be with us for some time. Consumption is still tentative, especially in countries where household balance sheets remain weak and rising unemployment is likely to cast a long shadow.”
US Treasury secretary Timothy Geithner also struck a cautious note in a statement read for him at the meeting by acting under secretary for international affairs Mark Sobel. “We are witnessing stabilization of the global economy and the beginnings of recovery,” he noted. “But we cannot be complacent. Conditions remain fragile.”
The current global crisis “is an exact replay of what we went through [earlier] in Japan,” Richard Koo, chief economist at the Tokyo-based Nomura Research Institute, argued at Tuesday’s IMF seminar.
The collapse of the bubble in Japan caused a loss of wealth equivalent to $15 trillion, driving corporate and household balance sheets “under water,” said Koo. In the ten years that corporations spent paying down their debts, private investment collapsed, the government had to take over as spender of last resort, plunging it too deep into debt.”
Governments must get used to the idea that it may take equally long to climb out from under the global recession, Koo suggested. “I would like to see a credible ten-year loan amortisation plan” for banks in the US, he said.
Stimulus must be maintained in advanced economies until recovery is well entrenched and balance sheets have been restructured, Singh argued. There can be no lasting recovery until the corporate and financial sectors are restored to health. “ We should welcome the G20 call for exit strategies – but not yet.”