The United States and European countries can take steps to avoid making the same economic mistakes that Japan committed during the latter's "lost decade," a Stanford economist wrote in a new paper.

The study, published in the IMF Economic Review, describes the reasons Japan was not able to pull out of its long recession in the 1990s, offering some lessons for U.S. and European leaders in the wake of the 2007-09 meltdown.

In particular, the delay in bank recapitalization and the lack of structural reforms in the economic sphere kept Japan from realizing a full recovery, wrote Takeo Hoshi, the Henri and Tomoye Takahashi senior fellow at Stanford's Freeman Spogli Institute for International Studies.

"Bank recapitalization" refers to a governmental reorganization of failing banks, often involving the use of public money to keep them solvent. "Structural reforms" describes how a government might overhaul its economic structures to increase business competition – such as deregulation to cut costs for firms.

The shortcomings in these two policy areas "retarded Japan's recovery from the crisis and were responsible for its stagnant post-crisis growth," said Hoshi, whose co-author was Anil K. Kashyap, an economics professor at the University of Chicago Booth School of Business.

Risky bank lending

Japan's "lost decade" originally referred to the 1990s, though the country has still not regained the economic power it enjoyed in the 1970s and 1980s. Some say Japan has actually experienced two lost decades if the 2000s are counted as well.

Faced with a huge financial crisis at the dawn of its lost decade, Japan had to navigate challenges that other advanced economies had not confronted since the Great Depression, Hoshi and Kashyap wrote.

However, government leaders made mistakes, Hoshi said. One was failure to rehabilitate the banks and another was to misunderstand the nature of the problems afflicting the Japanese economy. For example, much like the United States in 2007-09, the Japanese banks had made many dubious loans to risky customers.

"Instead of recognizing that major structural adjustments were needed, much of the policy response was calibrated under the assumption that Japan faced a simple cyclical problem that could be addressed with indiscriminate fiscal stimulus," wrote Hoshi, the director of the Japan Program at the Walter H. Shorenstein Asia-Pacific Research Center.

For example, on the demand side, monetary policy was not as expansionary as it could have been, he said. Deflation persisted for a long time. And fiscal stimulus packages – such as tax cuts – were inconsistent. Meanwhile, much of Japan's fiscal spending took the form of public works projects that had low productivity.

As for structural reforms, the Japanese government lacked a sense of urgency. For example, even in the reform-minded administration of former Prime Minister Junichiro Koizumi, only eight of the proposed 35 reform initiatives would have directly boosted growth. Of the others, 16 might have indirectly supported growth and 11 would have had no effect on growth, Hoshi said.

Drastic change needed

Unfortunately, some European nations seem to be following Japan's lead, Hoshi said.

"In France, Italy and Spain, bank recapitalization has been delayed and the structural reforms have been slow. Without drastic changes, they are likely to follow Japan's path to long economic stagnation," Hoshi and Kashyap wrote.

The problems that held back Japan seem to be less serious in the U.S., Hoshi said: "Employment protection is low in the United States and the labor market shows high mobility. The regulatory advantage for incumbent firms is smaller than in Europe or Japan and starting new business is relatively easy."

As the researchers noted, the United States and Germany are in a bit better economic shape, partly due to the fact that they did undertake structural reforms sooner rather than later. The U.S. was able to recapitalize its banks more quickly, for example.

Still, five years after the failure of the Lehman Brothers investment bank left the world's financial markets in chaos, the U.S. and Europe are not yet back to what had looked normal before the crisis, according to the research. For instance, employment levels have not reached the levels seen before the 2007-09 crash.

"The U.S. recovery has been tepid despite a number of extraordinary macroeconomic policies (at least in the traditional sense). This suggests that the U.S. economy also has problems, but they are just different from those in Japan and in Europe," Hoshi said.

In the years leading up to the financial crisis, the researchers wrote, U.S. growth was fueled by a consumption boom from rapid housing price increases and rising debt levels.

"In a broad sense, the U.S. economy before the crisis was similar to the Japanese or Spanish economies," noted Hoshi, adding that in Japan, the speculative investment boom in the late 1980s masked structural problems.

Clifton Parker is a writer for the Stanford News Service.

The United Nations has thus far fulfilled its charter to prevent a third world war, but with 60 million refugees, continued bloodshed with unresolved civil conflicts and terrorism spreading like cancer, the world's leading peacekeeping organization must spearhead global action, U.N. Secretary-General Ban Ki-moon said Friday at Stanford on the 70th anniversary of the international organization.

Ban, the U.N.'s eighth secretary-general, did not rest on any laurels during his speech at a public event sponsored by the Walter H. Shorenstein Asia-Pacific Research Center (APARC). "I humbly accept criticism that the U.N. is not doing enough," he said. 

However, the situation could have been worse if not for the United Nations, he continued. "Without peacekeepers, or without the U.N.'s continued humanitarian assistance and advocacy of human rights, I'm afraid to tell you that this world would have been poorer, more dangerous and even bloodier without the United Nations."

Ban's visit to Stanford – his second to the university in less than three years – was part of a trip to the Bay Area to commemorate the signing of the U.N. charter. In 1945, representatives from 50 nations gathered in San Francisco to create the United Nations – an international organization aimed at saving future generations from the "scourge of war."

Today, the United Nations has grown to 193 member nations. Its challenges – from climate change and poverty to civil wars and terrorism – have never been greater, Ban said.

"This is a critical year; 2015 is a year of global action," he said. "The U.N. cannot do it alone. We need strong solidarity among government, business communities and civil societies, from each and every citizen."

The fact that so many young people around the globe are drawn to violent narratives is worrisome, Ban said. "Violent terrorism is spreading like cancer around the world."

The rise in terrorist activities stems from "a failure of leadership," he said. That's why the United Nations needs to develop a comprehensive plan of action to address extremism, he maintained.

The U.N.'s 70th anniversary coincidentally fell on a momentous day of tragedy and celebration around the world. Dozens were killed when terrorists launched horrific attacks across three continents – in France, Tunisia and Kuwait – fueling anger, sadness and fear of more violence.

But in the United States, celebrations rang out in response to a landmark U.S. Supreme Court ruling that legalizes same-sex marriages nationwide.

Ban, who has long advocated for equality and last year pushed the United Nations to recognize same-sex marriages of its staff, drew a round of applause when he heralded the court ruling as "a great step forward for human rights."

The June 26 event was co-sponsored by Shorenstein APARC and the Freeman Spogli Institute for International Studies at Stanford University, with promotional co-sponsors Asia Society, Asia Foundation and the World Affairs Council of Northern California. 

May Wong is a freelance writer for the Stanford News Service.

Coverage and related multimedia links:

Remarks at Stanford University by Ban Ki-moon (U.N. News Centre, 6/26/15)

Photos of Ban Ki-moon at Stanford University (U.N. Photo, 6/26/15)

At Stanford University, Ban says U.N. ready to build a better future for all (U.N. News Centre, 6/27/2015)

U.N. Secretary-General Ban Ki-moon welcomes growing engagement of India, China (NDTV, 6/27/2015)

U.N. Secretary-General Ban Ki-moon speaks at Stanford, celebrates U.N.'s 70th anniversary (Stanford Daily, 6/29/15)

Hoover archival photographs featured at lecture delivered by U.N. Secretary-General Ban Ki-moon (Hoover Institution, 6/29/2015)

China’s remarkable aggregation of national power over the past 35 years has been a source of wonderment: to economists, who have been surprised by that country’s consistently high rate of growth; to political scientists, who are at a loss to explain the persistence of authoritarian Communist Party rule despite its more open market order; and to historians, who describe China’s meteoric rise as unprecedented. But to the U.S. national security community, China’s swift climb up the international power ladder has been a source less of wonderment than of increasing concern.

How should America evaluate the risks that the People’s Republic of China (PRC) poses to its current and future interests? It is a crucial question, since sound strategy depends on an accurate assessment of the capabilities and intentions of potential rivals. Significantly underestimating China’s ambitions and its future means to advance them could render the United States strategically vulnerable. Exaggerating those same factors risks an inefficient use of America’s diplomatic, military, and economic resources, while counterproductively stimulating more vigorous PRC investments in hard power than would otherwise be the case.

Much literature has appeared in recent years speculating on future Sino-American cooperation, competition, or conflict. While there is no shortage of theories of international relations to inform conjecture on likely future scenarios, two in particular highlight the sharp contrasts in approach and perspectives that characterize this debate. The first is realism, which assumes an evolving international environment in which fierce competition between leaders and challengers is the norm. The realist dynamic is sometimes called the “Thucydides Trap”, a term inspired by Thucydides’ famous account of the seemingly inevitable conflict between the rising city-state of Athens and the status quo power Sparta as they struggled for dominance of Ancient Greece in the fifth century BCE. Realists who embrace the Thucydides Trap metaphor argue that the risks of hegemonic wars between rising states (such as China) and status quo states (such as the United States) are high. A second and contrasting theory framing this discussion is neoliberalism, which assumes that open-access political systems (which China is not) and market-based economic exchange create opportunities for the realization of positive sum gains between competing powers. Deepening socio-economic interdependence, encouraged and sustained by skillfully designed international institutions, can ensure stability and growing prosperity.

These two perspectives promote very distinct U.S. approaches for dealing with the challenges posed by a rising China. Realists, who believe that states operate in an unsentimental and unforgiving environment, would advise current U.S. leaders to keep ample powder dry, to leverage existing and acquire new allies, and to occasionally accommodate when relevant U.S. interests are much less than those of China. Persuaded that the China locomotive will keep speeding down the tracks in the years ahead, a realist would point to growing U.S.-China friction in the East and South China Seas as the shape of things to come.

Neoliberals would advise the status quo power to maintain the vibrancy and appeal of liberal political-economic norms and institutions in the belief that the contender will find it more advantageous to be a member of a successful club than to start one of its own. More importantly, neoliberals argue that long-term club membership leads to co-option and to an evolutionary change in the contender’s values. Of course, the neoliberal predictions of co-option and an evolutionary change in values are sharply at odds with those of China’s Communist Party, whose leaders envision no evolution concerning its monopoly on political power.

Both Thucydidean realists and neoliberals warn against the adoption of the other’s viewpoint. Realists point out that overly-optimistic predictions of China’s power trajectory could result in a less robust U.S. foreign policy that might encourage PRC aggression, undermine America’s reputation, discourage the commitment of allies, and set conditions for the possibility of a significant strategic setback. Neoliberals counter that too muscular a policy could undercut cooperative efforts at securing optimal agreements between the United States and China that might help improve long-term relations. Moreover, while either side could be correct, both could prove irrelevant if China’s growth slows significantly, seriously weakening its prospects to become a truly formidable challenger.

No matter what the perspectives or underlying assumptions, any useful analysis of this vexing and serious policy dilemma requires a deep understanding of China’s current standing in both regional and global affairs, as well as comprehensive knowledge of the internal and external constraints it faces in trying to realize its long-term ambitions. An effective China policy for the United States is best built on a foundation that is grounded in sober, thorough assessments of the context in which Sino-American relations exist and operate. [...]

The first paragraphs of the article "China's Place in U.S. Foreign Policy" (The American Interest, vol. 10, no. 6) have been reproduced here with permission; access to the full article is available on The American Interest website. 

Karl Eikenberry is a distinguished fellow at the Freeman Spogli Institute for International Studies, and director of the U.S.-Asia Security Initiative at the Walter H. Shorenstein Asia-Pacific Research Center, announced earlier this month.

Stanford University’s Walter H. Shorenstein Asia-Pacific Research Center (APARC) is launching a U.S.-Asia Security Initiative spearheaded by a former top American diplomat to deepen dialogue on contemporary Asia-Pacific security issues and to further bridge American and Asian academics, government officials and industry leaders.

A new and uncertain multipolar system is emerging in Asia. The United States is and will remain a global power, but it is evident the post-Cold War international order is increasingly under strain. There is a pressing need for research about how developments in the Asia-Pacific region impact U.S. interests, and what the optimal strategies are to respond. Led by Karl Eikenberry, who served as U.S. ambassador to Afghanistan from 2009 to 2011, the initiative will look beyond simplistic notions of nations engaging harmoniously or competing against each other and explore a range of policy options.

Combining expertise from across Stanford University, the initiative will gather faculty and researchers from the Freeman Spogli Institute for International Studies (FSI), and take place under the auspices of Shorenstein APARC, a center focused on interdisciplinary research on contemporary issues of international cooperation, governance and security in the Asia-Pacific region.

Eikenberry, an Oksenberg-Rohlen Distinguished Fellow at Shorenstein APARC, retired from the U.S. Army as a lieutenant general after 35 years of service before taking the role as ambassador. At Stanford, he has returned to an early and longstanding interest in Asia, contributing to an urgent discussion about how the United States should respond regionally and globally to an increasingly strong China. The initiative is founded on the premise that there is a role for an institution that not only fosters groundbreaking research, but also serves to convene academic and governmental expertise from across the Asia-Pacific region in a dialogue aiming to inform policy and strategy.

“As China rises and Japan seeks a greater defense role in Asia, a number of questions are raised over the United States’ role in the region. This creates a great impetus for stakeholders to gather and develop an understanding of today’s perplexing security issues,” Eikenberry said.

“It’s an honor to lead this Stanford initiative and make possible opportunities for students, scholars, peers and leaders across the world.”

Before arriving at Stanford, Eikenberry’s Asia-related postings included assistant army, and later, defense attaché at the U.S. Embassy Beijing, operational assignments in the Republic of Korea and Hawaii, Director for Strategic Plans and Policy at U.S. Pacific Command, Senior Country Director for China at the Office of the Secretary of Defense, and two senior command tours in Afghanistan. He is a graduate of the U.S. Military Academy, holds master’s degrees from Harvard University and Stanford University, and has an advanced degree in Chinese history from Nanjing University.

The three-year initiative will build synergies with existing activities at Stanford, drawing scholars, government officials and industry leaders to engage at conferences and public seminars on important U.S.-Asia security themes. Understanding that inquiry is enlivened through interdisciplinary dialogue, participants will share best practices across multiple fields including diplomacy, military strategy and environmental risk.

“I can’t think of a better person to drive this initiative – Karl has a profound understanding of the economic, diplomatic and military complexities in the region. I have every confidence that it will develop into a robust, established project under his leadership,” said Gi-Wook Shin, director of Shorenstein APARC.

Launching July 1, 2015, the initiative aims to bolster local, national and global networks through several foundational components, including a core working group of experts from Stanford and peer institutions to provide new perspectives on U.S. policies in Asia; educational opportunities for Stanford students; and public programs that will bring intellectual and strategic leaders to Stanford to enrich the conversation on Asia-Pacific security.

The initiative seeks to operate as a focal point for academic scholarship on the west coast of the United States and offer practical steps that stakeholders can take to strengthen the security architecture and U.S. alliance commitments in the region. Outcomes from the initiative’s activities will include publications and policy reports, many of which will be offered open access online.

“As the Asia-Pacific region continues to rise, we see new threats but also greater opportunity to work together,” said Michael McFaul, director of FSI. “Stanford and FSI excel in offering practical solutions to policy challenges and can play a role in identifying strategies aimed at maintaining peace and stability in the region.”

Initiative inquires: Charlotte Lee, Shorenstein APARC, cplee@stanford.edu, (650) 725-6445

Media inquires: Lisa Griswold, Communications and Outreach Coordinator, Shorenstein APARC, lisagris@stanford.edu, (650) 736-0656