Similarities with Japan troubling

Beijing —- At the end of the 1980s, Japan was basking in prosperity. The stock market had climbed to dizzying heights. Banks loaned money with only cursory background checks. Property prices were so inflated that one report estimated that Tokyo’s Imperial Palace was worth more than the state of California.

The story since, however, has been dismal. Between 1990 and 2005, economic growth slowed to little more than 1 percent annually. Property and stock values collapsed.

It’s been dubbed the “lost decade,” and the riches-to-rags story has raised concerns among experts that the U.S. could face a similar prolonged recession.

In Japan, the world’s second largest economy after the United States, bursting property and stock bubbles left banks short of cash and unwilling to lend.

Japan’s central bank cut the nation’s benchmark interest rates —- eventually to almost zero —- to stimulate lending, but prices continued to fall as demand for goods plummeted.

U.S. Federal Reserve policy makers will meet on Monday and Tuesday, and analysts expect them to cut the short-term borrowing rate below 1 percent.

Many experts see troubling similarities between Japan’s crash and prolonged stagnation and the current economic crisis in the United States.

“A lot more people in the United States are vulnerable and exposed [than in Japan in the 1990s],” said Jeffrey Kingston, director of Asian Studies at Temple University’s Tokyo campus. “Just flooding the market with cheap liquidity is not going to address the feeling of insecurity that most people have.”

Japan, amid the current global recession, is still trying to dig its way out.

Prime Minister Taro Also on Friday announced a stimulus package worth about $255 billion to bolster Japan’s economy, encouraging new hiring and lending and injecting capital into financial markets. “We need to implement policies to prevent the economy from falling apart,” Economic and Fiscal Policy Minister Kaoru Yosano told reporters in Tokyo earlier this week.

Since 1991, average Japanese house prices have fallen about 40 percent. In some parts of the United States, housing prices already have dropped more than 35 percent, and many economists expect average U.S. house prices to fall for at least another year.

Stock market declines in Japan and the United States were also both steep.

Japan’s economic decline was made worse by falling consumer confidence. As unemployment rose and wages fell, people spent less.

Widespread price declines —- deflation —- resulted as Japan’s central bank lowered interest rates to make borrowing money cheaper. The central bank lowered the interest rate almost to zero in 1998.

With prices falling, convincing people to buy can be hard.

“Once you get caught in a deflationary spiral, it becomes self-reinforcing,” said Michael Pettis, an American professor of finance at Peking University in Beijing. “If prices are going down, why should people buy now?”