IMF Economic Review

, Volume 63, Issue 1, pp 110–163 | Cite as

Will the U.S. and Europe Avoid a Lost Decade? Lessons from Japan’s Postcrisis Experience

  • Takeo Hoshi
  • Anil K Kashyap


This paper reexamines Japanese policy choices during its banking crisis in the 1990s and draws some lessons relevant for the United States and Europe in the aftermath of the global financial crisis of 2007–09. The paper focuses on two aspects of postcrisis economic policy of Japan: the delay in bank recapitalization and the lack of structural reforms. These two policy shortcomings retarded Japan’s recovery from the crisis and were responsible for its stagnant postcrisis growth. The paper also suggests some political economy factors that contributed to the Japanese policies. 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. The situation in Germany looks somewhat better mainly because the structural reform was undertaken before the crisis. Although the recovery has been slow in the United States as well, the problems are at least different from those faced by Japan then and many European countries now.

JEL Classifications

E65 G01 G28 


  1. Andersen, Derek, Berglijot Barkbu, Lusine Lusinyan, and Dirk Muir, 2014, “Assessing the Gains from Structural Reforms for Jobs and Growth,” in Jobs and Growth: Supporting the European Recovery, ed. by Martin Schindler, Helge Berger, Bas B Bakker, and Antonio Spilimbergo (Washington DC: International Monetary Fund).Google Scholar
  2. Angelopoulou, Eleni, Hiona Balfoussia, and Heather Gibson, 2013, “Building a Financial Conditions Index for the Euro Area and Selected Euro Area Countries: What Does it Tell us about the Crisis?” ECB Working Paper 1541.Google Scholar
  3. Bailey, Martin Neil and Barry Bosworth, 2013, “The United States Economy: Why such a Weak Recovery?” Paper prepared for the Nomura Foundation’s Macro Economy Research Conference “Prospects for Growth in the World’s Four Major Economies,” September 11, The Brookings Institution, Washington, DC.Google Scholar
  4. Baker, Scott R., Nicholas Bloom, and Steven J. Davis, 2013, “Measuring Economic Policy Uncertainty,” Working Paper (University of Chicago).Google Scholar
  5. Barclays Capital Research. 2011, “Euro Area Bank Deleveraging: How Much and How Painful?” November 22, Equity Research, European Banks.Google Scholar
  6. Caballero, Ricardo J., Takeo Hoshi, and Anil K. Kashyap, 2008, “Zombie Lending and Depressed Restructuring in Japan,” American Economic Review, Vol. 98, No. 5, pp. 1943–77.CrossRefGoogle Scholar
  7. Chari, Anusha and Peter Blair Henry, 2014, “Two Tales of Adjustment: East Asian Lessons for European Growth,” forthcoming IMF Economic Review.Google Scholar
  8. Charles, Kerwin Kofi, Erik Hurst, and Matthew J. Notowidigdo, 2013, “Manufacturing Decline, Housing Booms, and Non-Employment,” NBER Working Paper 18949.Google Scholar
  9. Doi, Takero and Toshihiro Ihori, 2009, The Public Sector in Japan: Past Developments and Future Prospects (Cheltenham, UK: Edward Elgar).Google Scholar
  10. Dornbusch, Rudiger and Stanley Fischer, 1986, “Stopping Hyperinflations Past and Present,” Review of World Economics (Weltwirtschaftliches Archiv), Vol. 122, No. 1, pp. 1–47.CrossRefGoogle Scholar
  11. Drechsler, Itamar, Thomas Drechsel, David Marques, and Philip Schnabl, 2013, “Who Borrows From the Lender of Last Resort?”, Working Paper (Stern School of Business).Google Scholar
  12. Estévez-Abe, Margarita, 2008, Welfare and Capitalism in Postwar Japan (New York: Cambridge University Press).CrossRefGoogle Scholar
  13. Fischer, Stanley, 1987, “Monetary Policy and Performance in the U.S., Japan and Europe, 1973–86,” NBER Working Paper No. 2475.Google Scholar
  14. Fischer, Stanley, 2011, “Central Bank Lessons from the Global Crisis,” Dinner Lecture at the Bank of Israel Conference on “Lessons of the Global Crisis,” Jerusalem, March 31. Available via the BIS:
  15. Frankel, Jeffrey A. and Jesse Schreger, 2012, “Over-Optimistic Official Forecasts in the Eurozone and Fiscal Rules,” NBER Working Paper No. 18283. Available via the SSRN:
  16. Freier, Maximilian, 2008, “Political Economy of the Agenda 2010 Reforms: How Gerhard Schröder Overcame the ‘Blocked Republic’,” American Consortium on European Union Studies (ACES) Cases, No. 2008.3. Available via the ACES: Scholar
  17. George Mulgan, Aurelia, 2000, The Politics of Agriculture in Japan (London, UK: Routledge).Google Scholar
  18. Greenlaw, David, Anil K. Kashyap, Kermit Schoenholtz, and Hyun Song Shin, 2011, Stressed out: Macroprudential principles for stress testing in the U.S. Monetary Policy Forum Report No. 5, Initiative on Global Markets, University of Chicago Booth School of Business.Google Scholar
  19. Hamada, Koichi, Anil K. Kashyap, and David E. Weinstein, 2010, Japan’s Bubble, Deflation, and Long-term Stagnation (Cambridge, MA: MIT Press).CrossRefGoogle Scholar
  20. Hoshi, Takeo, 2002, “The Convoy System for Insolvent Banks: How It Originally Worked and Why It Failed in the 1990s,” Japan and the World Economy, Vol. 14, No. 2, pp. 155–180.CrossRefGoogle Scholar
  21. Hoshi, Takeo, 2013, “Role of Central Banks in Financial Stability: Lessons from the Experience of the Bank of Japan,” in The Role of Central Banks in Financial Stability: How Has It Changed? ed. by Douglas D. Evanoff, Cornelia Holthausen, George G. Kaufman, and Manfred Kremer (Singapore: World Scientific Publishing).Google Scholar
  22. Hoshi, Takeo, and Anil K. Kashyap, 1999, “The Japanese Banking Crisis: Where Did It Come From and How Will It End?” in NBER Macroeconomics Annual 1999, Vol. 14, ed. by Ben Bernanke and Julio Rotemberg (Cambridge, MA: MIT Press), pp. 129–201.Google Scholar
  23. Hoshi, Takeo and Anil K. Kashyap, 2010, “Will the U.S. Bank Recapitalization Succeed? Eight Lessons from Japan,” Journal of Financial Economics, Vol. 97, No. 3, pp. 398–417.CrossRefGoogle Scholar
  24. Hoshi, Takeo and Anil K. Kashyap, 2011, Why did Japan Stop Growing, Report prepared for National Institute for Research Advancement.Google Scholar
  25. Hoshi, Takeo and Anil K. Kashyap, 2012, Policy Options for Japan’s Revival, Report prepared for National Institute for Research Advancement.Google Scholar
  26. International Monetary Fund. 1997, World Economic Outlook, May 1997.Google Scholar
  27. International Monetary Fund. 2003a, United States of America: Staff Report for the 2003 Article IV Consultation, July.Google Scholar
  28. International Monetary Fund. 2003b, France: Staff Report for the 2003 Article IV Consultation, September.Google Scholar
  29. International Monetary Fund. 2003c, Germany: Staff Report for the 2003 Article IV Consultation, October.Google Scholar
  30. International Monetary Fund. 2003d, Italy: Staff Report for the 2003 Article IV Consultation, October.Google Scholar
  31. International Monetary Fund. 2004, Spain: Staff Report for the 2003 Article IV Consultation, February.Google Scholar
  32. International Monetary Fund (IMF). 2009, Global Financial Stability Report, World Economic and Financial Surveys (Washington, DC, October).Google Scholar
  33. International Monetary Fund. 2013a, France: Staff Report for the 2013 Article IV Consultation, August.Google Scholar
  34. International Monetary Fund. 2013b, Spain: Staff Report for the 2013 Article IV Consultation, August.Google Scholar
  35. International Monetary Fund. 2013c, Italy: Staff Report for the 2013 Article IV Consultation, September.Google Scholar
  36. International Monetary Fund. 2014, Euro Area Policies: Staff Report for the 2014 Article IV Consultation with Member Countries, June 25.Google Scholar
  37. Ito, Takatoshi and Kimie Harada, 2006, “Bank Fragility in Japan,” in Japan’s Great Stagnation: Financial and Monetary Policy Lessons for Advanced Economies, ed. by Michael M. Hutchison, and Frank Westermann (Cambridge, MA: MIT Press), pp. 33–60.Google Scholar
  38. Jordà, Òscar, Mortiz Schularick, and Alan M. Taylor, 2013, “When Credit Bites Back,” Journal of Money, Credit, and Banking, Vol. 45, No. S2, pp. 3–28.CrossRefGoogle Scholar
  39. Kamada, Koichiro, 2005, “Real-Time Estimation of the Output Gap in Japan and its Usefulness for Inflation Forecasting and Policymaking,” North American Journal of Economics and Finance, Vol. 16, No. 3, pp. 309–332.CrossRefGoogle Scholar
  40. Kamikawa, Ryunoshin, 2005, “Kin’yū Kiki no Naka no Ōkura-shō to Nihon Ginkō (Ministry of Finance and Bank of Japan in Financial Crisis),” in Heisei Bubble Sakiokuri no Kenkyu [Study on Procrastination in Heisei Bubble], ed. by Michio Muramatsu (Tokyo, Japan: Toyo Keizai Shimpo-sha), pp. 215–276.Google Scholar
  41. Kashyap, Anil K., 2002, “Sorting Out Japan’s Financial Crisis,” Federal Reserve Bank of Chicago Economic Perspectives, Fourth Quarter, Volume 26 (October, 4th Quarter), pp. 42–55.Google Scholar
  42. Keefer, Philip E., 2013, “Database of Political Institutions 2012 (Updated Jan. 2013)”, the World Bank. Available at:
  43. Kume, Ikuo, 2005, “Saki-Okuri to Zaisei Seisaku [Procrastination and Fiscal Policy],” in Heisei Bubble Sakiokuri no Kenkyu (Study on Procrastination in Heisei Bubble), ed. by Michio Muramatsu (Tokyo, Japan: Toyo Keizai Shimpo-sha), pp. 278–312.Google Scholar
  44. Lynch, Julia, 2006, Age in the Welfare State: The Origins of Social Spending on Pensioners, Workers, and Children (New York: Cambridge University Press).CrossRefGoogle Scholar
  45. Macroeconomic Advisers, LLC. 2013, The cost of crisis-driven fiscal policy, Report prepared for the Peter G. Peterson Foundation,
  46. Mikuni, Akio and R. Taggart Murphy, 2002, Japan’s Policy Trap: Dollars, Deflation, and the Crisis of the Japanese Finance (Washington DC: Brookings Institution Press).Google Scholar
  47. Milhaupt, Curtis and Geoffrey Miller, 2000, “Regulatory Failure and the Collapse of Japan’s Home Mortgage Lending Industry: A Legal and Economic Analysis,” Law & Policy, Vol. 22, No. 3–4, pp. 245–290.CrossRefGoogle Scholar
  48. Nishimura, Yoshimasa, 1999, Kin’yū Gyōsei no Haiin [Causes of Failure of Financial Policies] (Tokyo, Japan: Bungei Shinsho).Google Scholar
  49. OECD. 1997, OECD Economic Surveys: Japan 1997 (Paris: OECD).Google Scholar
  50. Ostry, Jonathan D., Atish R. Ghosh, Jun I. Kim, and Mahvash S. Qureshi, 2010, “Fiscal Spaces,” IMF Staff Position Note, SPN/10/11.Google Scholar
  51. Peek, Joe and Eric S. Rosengren, 2005, “Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan,” American Economic Review, Vol. 95, No. 4, pp. 1144–1166.CrossRefGoogle Scholar
  52. Posen, Adam S., 1998, Restoring Japan’s Economic Growth (Washington, DC: Peterson Institute for International Economics).Google Scholar
  53. Reinhart, Carmen M. and Kenneth S. Rogoff, 2009a, This Time is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press).Google Scholar
  54. Reinhart, Carmen M. and Kenneth S. Rogoff, 2009b, “The Aftermath of Financial Crises,” American Economic Review, Vol. 99, No. 2, pp. 466–72.CrossRefGoogle Scholar
  55. Romer, Christina D. and David H. Romer, 2013, “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter,” American Economic Review, Vol. 103 (May) pp. 55–60.CrossRefGoogle Scholar
  56. Rosenbluth, Frances and Michael F. Thies, 2001, “The Electoral Foundation of Japan’s Banking Regulation,” Policy Studies Journal, Vol. 29, No. 1, pp. 23–37.CrossRefGoogle Scholar
  57. Schaltegger, Christoph A. and Martin Weber, 2013, “Will Europe Face A Lost Decade? A Comparison With Japan’s Economic Crisis,” CREMA Working Paper No. 2013-03. Available via the Internet:
  58. Schröder, Gerhard, 2003, “Government Declaration of the Federal Chancellor to the German Bundestag on the Agenda 2010.” Available via the Internet:, cited by Frier (2008).Google Scholar
  59. Sekine, Toshitaka, Keiichiro Kobayashi, and Yumi Saita, 2003, “Forbearance Lending: The Case of Japanese Firms,” Monetary and Economic Studies, Vol. 21, No. 2, pp. 69–91.Google Scholar
  60. Shirakawa, Masaaki, 2008, Gendai no Kin’yū Seisaku: Riron to Jissai [Modern Monetary Policy in Theory and Practice: Central Banking and Financial Markets], (in Japanese) Tokyo: Nihon Keizai Shinbun Shuppan Sha).Google Scholar
  61. SPD. 2003, “Mut zur Veränderung,” Resolution of the federal party congress of the Social Democratic Party of Germany (SPD), 1 June 2003, Berlin. Available via the Internet:, cited by Frier (2008).
  62. Stock, James and Mark Watson, 2012, “Disentangling the Channels of the 2007–2009 Recession,” Brookings Papers on Economic Activity, Spring, pp. 81–135.Google Scholar
  63. Tett, Gillian, 2003, Saving the Sun: How Wall Street Mavericks Shook Up Japan’s Financial World and Made Billions (New York: HarperCollins Publishers).Google Scholar
  64. Tosetto, Elena, 2008, Revision of Quarterly Output Gap Estimates for 15 OECD Member Countries, OECD Statistics Directorate. Available via the Internet:
  65. Underhill, Geoffrey R. D., 2012, “The Political Economy of (Eventual) Banking Union,” Vox, CEPR’s Policy Portal, October 16. Available at:
  66. van der Veer, Koen and Marco Hoeberichts, 2013, “The Level Effect of Bank Lending Standards on Business Lending,” DNB Working Paper No. 396.Google Scholar
  67. van Wijnbergen, Sweder and Timotej Homar, 2013, “Recessions after Systemic Banking Crises: Does It Matter How Governments Intervene?” Tinbergen Institute Discussion Paper TI 13-039/IV/DSF54.Google Scholar
  68. Vegh, Carlos A. and Guillermo Vuletin, 2014, “The Road to Redemption: Policy Response to Crises in Latin America,” forthcoming IMF Economic Review.Google Scholar
  69. Weidner, Justin and John C. Williams, 2014, “Update of ‘How Big is the Output Gap?’” Federal Reserve Bank of San Francisco, mimeo. Available via the Internet: (last accessed August 6, 2014).

Copyright information

© International Monetary Fund 2015

Authors and Affiliations

  • Takeo Hoshi
  • Anil K Kashyap

There are no affiliations available

Personalised recommendations