What the U.S. Can Learn from Japan's Lost Decade

Ever since the U.S. financial crisis began in August 2007, policymakers have reassured us that the U.S. knows better than to repeat the mistakes Tokyo made during Japan's "Lost Decade" of the 1990s. The ill health of Japan's financial system caused an economic slump to stretch on for years. But as weakened U.S. banks hoard cash rather than lend, such talk is beginning to ring hollow. At the annual meeting of the American Economic Assn. in San Francisco on Jan. 3-5, several leading economists argued that the U.S. is in danger of getting stuck in the same hole.

The message from San Francisco is being heard in Washington, where the incoming Obama Administration is making economic recovery priority No. 1. Economists say Obama must devise a strategy to repair the financial system as quickly as possible so the economy can stage a normal recovery. The key will be pumping plenty of capital into the healthier banks and shutting down the sickest ones. Doing so will give the private sector the confidence to invest in the surviving banks so they have the money to lend normally once again.