Financial crisis in US and euro area in 2007 vs Japan crisis in 1990s

A note in ECB’s latest bulletin on the topic. The usual fashion is to compare US-2007 with Japan-90. Here we have US/Euroarea-2007 with Japan 90.

The authors feel it is unlikely that US/EU will be like Japan in 1990s. Highly optimistic …

The global financial crisis, which began as a US sub-prime debt crisis and has subsequently undergone a number of different stages – the latest being the euro area sovereign debt crisis – sharply changed the growth trajectory in the United States and the euro area. A severe recession was followed by a relatively muted recovery and a period of modest growth is expected to follow over the next few years. Consequently, several commentators have compared the current situation in the United States and the euro area with Japan’s so-called “lost decade” in the 1990s. The latter is the most recent episode in which an advanced economy experienced a prolonged adjustment of sectoral balance sheets, persistent weak economic activity, rapidly rising government debt, and a sharp and protracted downward correction in asset prices.

However, there are important differences between the form of imbalances that occurred in Japan and those that triggered the recent financial crisis affecting the United States and the euro area. In Japan, it was mainly the corporate sector that needed to rebalance from excessive leverage, while in the United States, balance sheet problems lay with households, following the housing and credit boom. Meanwhile, in the euro area, balance sheet problems were less obvious at the aggregate level, but as the fi nancial crisis progressed, regional imbalances intensifi ed and leverage in some euro area Member States became excessive. Moreover, the severe deterioration in fiscal balances also led to increased risks to government debt sustainability, which lies at the heart of the sovereign debt crisis in a number of euro area countries, but also elsewhere.

The signifi cant differences in the economic causes behind and the policy response to Japan’s “lost decade” compared with the fi nancial crisis in the United States and the euro area suggest that each crisis is different and that the United States and the euro area are rather unlikely to tread the same path as Japan.

Lessons from Japan:

At the same time, however, Japan’s experience highlights the difficulties for economies emerging from balance sheet recessions and having to unwind large imbalances to restore growth prospects and achieve a sustainable and enduring recovery. One lesson is that the fi nancial system needs to be repaired before a durable economic recovery can take hold. Another lesson is that if reforms are not implemented, or if they are delayed, the recovery may be slow, fragile and prone to reversals, with problems stemming from structural deficiencies bound to reappear.

Have they been learnt from Japan? Not really…Then how can we be so sure that Japan is not repeated…

Infact the way Eurozone is progressing it could be worse than Japan…


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