The global economy seems destined to repeat the lost
decade that Japan endured after the collapse of its
bubble economy two decades ago, experts argued on Tuesday.
Governments will need to do things the Japanese
way, nursing banking systems slowly back to health and
going deeper into debt if global GDP is not to implode, they
said in Istanbul.
Green shoots of recovery that have appeared in some advanced
economies do not guarantee continuing recovery,
argued Anoop Singh, director of the IMFs Asia Pacific
Department. If Japans experience in the 1990s is
anything to go by, we are still in the very early stages of
economic recovery, he said.
Japan saw green shoots of recovery in several
episodes of apparent economic improvement recovery during its
post-bubble recession, James Gordon, IMF Asia Pacific
Department adviser, agreed. Each time, the green
shoots withered, after policymakers overestimated their
strength, he said.
Japan had at least two such false dawns in the 1990s before
lasting recovery set in from 2003 on, Singh said. Attempts to
withdraw fiscal and monetary stimulus led to a plunge back into
recession, while banking system damage took many years to
remedy. He saw strong parallels with the global economy
This highly cautious tone was echoed by IMF managing
director Dominque Strauss-Kahn. The crisis is not over
and recovery will be sluggish, he emphasised in his
speech at the opening plenary session of the annual
Private demand is not yet self-sustaining, he
said. The spectre of deleveraging will be with us for
some time. Consumption is still tentative, especially in
countries where household balance sheets remain weak and rising
unemployment is likely to cast a long shadow.
US Treasury secretary Timothy Geithner also struck a
cautious note in a statement read for him at the meeting by
acting under secretary for international affairs Mark Sobel.
We are witnessing stabilization of the global economy and
the beginnings of recovery, he noted. But we cannot
be complacent. Conditions remain fragile.
The current global crisis is an exact replay of what
we went through [earlier] in Japan, Richard Koo, chief
economist at the Tokyo-based Nomura Research Institute, argued
at Tuesdays IMF seminar.
The collapse of the bubble in Japan caused a loss of wealth
equivalent to $15 trillion, driving corporate and household
balance sheets under water, said Koo. In the ten
years that corporations spent paying down their debts, private
investment collapsed, the government had to take over as
spender of last resort, plunging it too deep into
Governments must get used to the idea that it may take
equally long to climb out from under the global recession, Koo
suggested. I would like to see a credible ten-year loan
amortisation plan for banks in the US, he said.
Stimulus must be maintained in advanced economies until
recovery is well entrenched and balance sheets have been
restructured, Singh argued. There can be no lasting recovery
until the corporate and financial sectors are restored to
health. We should welcome the G20 call for exit
strategies but not yet.