It was not at all what the experts predicted. Most of them did not foresee that an economic powerhouse could suffer so much damage in such a short period of time. They did not expect the fast-growing gross domestic product (GDP) to go so spectacularly into reverse, the real estate bubble to burst as violently as it did, and industrial production and capacity utilization to fall so steeply. Nor did they expect the stock market to plunge so dramatically from its all-time high—although it would recover some ground subsequently.
No, the Japanese (and Western) economists and analysts of 1991 predicted none of these developments. They expected that the 4 percent compound annual growth rate in real GDP that Japan had enjoyed for a decade would continue unabated. They expected that incomes, property values, industrial production, profits, and share prices would continue to rise.
But, as we know, Japan entered what is today called the Lost Decade. Between 1991 and 2001, its compound annual growth barely crept above 1 percent. The Japanese government dithered while the economy faltered. And, although there were a few quarters when things seemed to be improving, the Lost Decade actually extended considerably beyond 10 years.
Are we saying that the United States of 2009 is comparable with the Japan of 1991? Not exactly. The economies of the two countries are very different, as are the cultures and (critically) the demographics of the two populations. Also, the U.S. government responded faster and more aggressively to the financial crisis than Japan’s government did nearly 20 years ago.
But the real issue is not what has happened, but what happens next. Will the United States experience its own version of Japan’s Lost Decade? Many experts seem to assume that history, albeit displaced by a few time zones, will not repeat itself. But what if the present recovery were to resemble the experience in Japan?
In a survey of top executives we conducted in the fall of 2009, nearly half the respondents said that they expected postrecession growth to be anemic for an extended period. Thus, given the high risk that history may be repeating itself, companies should be acting as if it could. They should be figuring out—now—how to thrive in what many believe will be an economy operating in a damaged state for years to come. They should be acclimatizing to what has become known as the “new normal.”