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 Walter H. Shorenstein Asia-Pacific Research Center honored Wall Street Journal reporter Jacob Schlesinger with the Shorenstein Journalism Award last Monday. Schlesinger received the award, which includes a $10,000 cash prize, for his work on Japan that spans nearly three decades.

Since 2002, the annual award has sought to recognize journalists who are outstanding in their field of reporting on the Asia-Pacific, and whose work has helped enhance Western understanding of the region. A jury selects the finalist, which alternates each year between an American and Asian journalist.

At an evening ceremony, Stanford professor Gi-Wook Shin presented Schlesinger with the award surrounded by supporters and friends including Michael Armacost and John Roos '77, (J.D. ‘80), two former U.S. ambassadors to Japan, who both came to know Schlesinger personally during their diplomatic posts.

Earlier in the day, Schlesinger delivered a keynote speech on Japan’s economy and the media. Stanford economist Takeo Hoshi and Shorenstein APARC associate director Daniel Sneider joined him on the panel, along with New York Times deputy executive editor Susan Chira.

Schlesinger was a visiting fellow at Shorenstein APARC at Stanford's Freeman Spogli Institute for International Studies. Under the advisory of then-Shorenstein APARC director Daniel Okimoto, he worked on a book manuscript at Stanford which became Shadow Shoguns: The Rise and Fall of Japan’s Postwar Political Machine.

“No foreign journalist has covered Japan longer, or understood its political economy more deeply, than Jacob M. Schlesinger…” Okimoto said in the award announcement.

Schlesinger is based at the Journal’s Tokyo bureau as Senior Asia Economics Correspondent and Central Banks Editors, Asia, and tweets with the handle @JMSchles.

He answered a few questions for Shorenstein APARC about Japan’s political and economic climate, as well as the changing face of media there.

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Schlesinger spoke on a panel with Stanford's Daniel Sneider and Takeo Hoshi, and The New York Times's Susan Chira, followed by a private evening reception.

You’ve covered Japan for the Wall Street Journal for nearly a decade on the ground, in the late 1980s and early 90s and again since 2009. What has changed, or remained the same?

When I first covered Japan in the late ‘80s and early ‘90s, there was huge interest in -- and also a fair amount of mistrust and hostility toward -- Japan. Americans feared that Japan’s economy was going to somehow “defeat” ours (though I don’t think that notion ever really made sense), and constantly accused Japan of unfairly taking advantage of the global free trade system, exporting heavily to us while keeping its market closed to our goods.

After the bubble burst, and, more recently, Japan’s trade surplus disappeared, the anger toward Japan dissipated. But so, in some ways, did the interest. There are far fewer foreign correspondents today in Japan than there were when I was first there 25 years ago.

I think that the rise of Prime Minister of Japan Shinzo Abe, and Abenomics, has revived interest in Japan a bit, but in different ways. People want to know if Japan will rebound, in part as a counterweight to China, which has really surged in economic and political influence in the time since I was last in Japan. That perhaps may be one of the biggest changes -- the fact that so much is now seen through the prism of China. For a time China simply overshadowed Japan but now it has actually, in some ways, revived interest in it. 

What are the greatest challenges you’ve found in explaining the state of the Japanese economy and U.S.-Japan relations?

As I say, one challenge has been in getting people interested, and in explaining to them why it matters. China in particular has become such a big story that Americans sometimes lose sight of Japan's significance as well.

Another challenge is that Japan is a country where change, even big change, often happens in slow, subtle, steady steps. Japanese rhetoric tends to downplay the dramatic and to cast things in indirect terms, which can make it harder to describe statements and developments in ways that are accurate, and will seem interesting to readers.

Can you describe Abenomics and its current status?

Abenomics is Prime Minister Abe's program to try and end Japan's long slump, sometimes branded the “lost decades.” The most concrete and effective action to date has been a much more aggressive policy of monetary stimulus, following Abe's shake-up at the Bank of Japan (the nation’s central bank), where he imposed new leadership. That might be able to lift short-term growth. But Abe’s ambition to raise Japanese growth over the long-run – to a pace near that enjoyed by the United States and other advanced economies – requires extensive structural reforms. Abe has talked a lot about implementing such reforms, but has so far been rather timid in what he has proposed and pursued.

Abenomics also hit a deep pothole in 2014, when Abe decided to proceed with a plan to raise the sales tax, a policy aimed at reducing Japan’s very large outstanding government debt. The depressing impact of the tax basically offset the gains from the Bank of Japan’s stimulus, and Japan last year fell into recession.

It now appears that Japan is slowly pulling out of the recession, and, to ensure that his stimulus polices now work at full force, Abe has delayed plans for a second tax hike that had been scheduled for this year. That may set back long-held goals to reduce government debt, but it should help the chief Abenomics goal of exiting the long deflationary slump.

I'd say overall that Abenomics has a decent chance of lifting Japanese growth a bit higher than it would otherwise have been, but that a dramatic change in Japan’s fortunes would probably require a more dramatic change in policies, something Abe has promised but hasn’t really shown signs of seriously pursuing.

Recently, the United States invited Prime Minister Abe for a state visit (in addition to leaders of other Asian nations). What issues would likely top the agenda?

Both countries are hoping, overall, that the visit will deepen ties between the two governments at a time of great change and challenge in Asia. Whatever one might think of Prime Minister Abe and his agenda, this visit does offer a special opportunity to expand relations, simply because he has now been in office long enough to make multiple trips to Washington as prime minister -- a rare feat over the past quarter century of Japan's notorious carousel politics. The Japanese government is eager for Abe to be able to address a session of the U.S. Congress, which could carry great symbolic significance. He would be the first Japanese leader to do so in more than half a century, since Prime Minister Hayato Ikeda in the early 1960s. That's a pretty long gap, when you consider that Japan has, over that period, long been hailed as one of America's most important allies.

In terms of specific issues, the chief economic agenda item is the Trans-Pacific Partnership free trade pact. It's an ambitious project attempting to set the economic rules for the Pacific economies for the 21st century. And while 12 countries are included, the United States and Japan are by far the biggest, and both sides are hoping that a bilateral agreement by the time Abe meets President Obama could give the broader deal sufficient momentum to be concluded this year.

On the military front, the United States and Japan are updating the terms of their mutual defense pact and hope to do so in ways that will give Japan's military more latitude to participate in joint operations.

While not part of the official agenda, Americans will be eager to hear what Abe has to say about history issues as the world marks the 70th anniversary of the end of World War II.

Abe and his aides have repeatedly challenged some of the established views of Japan and its behavior during the war, including recently directly asking the American publisher McGraw-Hill to change its account of so-called “comfort women,” women forced into prostitution under Japan's war-time military. Such statements and actions have irritated many Americans and stoked anger in China and South Korea. American officials in particular are concerned about deteriorating relations between Japan and South Korea -- the two principle U.S. military allies in Asia -- and are eager for Abe to try and do more to bridge the gap, particularly on history issues. 

Newspapers have played a large role in Japanese society; the nation boasts one of the highest readerships in the world. Where do you see the future of news media in Japan?

Japan, as you say, has one of the most -- perhaps the most -- literate and well-informed populations in the world. News readership and news viewership is extremely high. People are extremely knowledgeable about current events.

Oddly, for a country that is also very tech literate, digital media has been relatively slow to catch on in Japan. Most people still get their main news from print papers, or magazines, and there has not been -- at least not yet -- a real surge in new, credible online-only, or online-originated media sources to challenge the mainstream media, the way platforms like Politico, the Huffington Post, or BuzzFeed have popped up in the United States.

The Japanese media has also suffered from some serious setbacks to its credibility in recent years. There was tremendous soul-searching after the 2011 Fukushima nuclear disaster about whether the Japanese press had done enough, either before the accident, or in the immediate aftermath, to cover aggressively the flaws and mistakes in the country's nuclear energy policies.

More recently, over the past year there have been damaging battles, in varying degrees, over the accuracy, and independence, of three of the country's largest, and most-respected news organizations, the Asahi Shimbun newspaper, the Yomiuri Shimbun newspaper, and the NHK national broadcaster. I worry that the result, fair or not, could prompt further erosion in the credibility of the Japanese media. That's potentially a big problem at a time of great change, great political and policy debate -- and when the political opposition is so weak that the media arguably has a heightened role at this moment as a check on power.

You were a visiting scholar at Shorenstein APARC. How did your time at the Center impact your work?

The Center was a tremendous opportunity for me in so many ways. It is rare for a journalist to be able to break out of the steady deadline pressures of a newsroom, and soak up an academic atmosphere. Being at Shorenstein APARC was a fantastic way to do that. It offered the best elements of an ivory tower, without feeling isolated. It gave me chances to interact with policymakers there as visiting fellows, as well as some of the top experts in the field who were based there.

I have to give particular thanks to Dan Okimoto, who ran Shorenstein APARC at the time and Jim Raphael, who was director of research. When I was at Shorenstein APARC, I was researching and writing a book on Japanese politics. The feedback from Dan, Jim and others made it a much better work. But beyond the book, the depth and perspective that I gained from my immersion at Shorenstein APARC has helped shape my writing since then.