Japan's lost decades

My latest piece for Research magazine, "Japan's Stock Market History Offers U.S. a Cautionary Tale," is now available online. Excerpt:

On December 29, 1989, Japan’s Nikkei 225 stock index closed out a triumphant decade at 38,916. The Nikkei had begun the 1980s below 7,000 and had pushed above 10,000 in August 1984. It had nearly quadrupled in just five years.

But the Nikkei slid back below 30,000 barely seven months later, and would spend most of the 1990s below the 20,000 line. In the first few years of the 21st century, it often traded below 10,000. A rebound from 2003 to 2007 brought hopes that Japan had moved beyond its “lost decade.” But by late 2008, the Nikkei was back in the four-digit range, and in March 2009 it hit its lowest point since October 1982.

The Nikkei’s rise and fall exemplifies the building and bursting of an asset bubble. It also indicates that cleaning up the mess in the aftermath of a busted “bubble economy” can be a lengthy process indeed. The story takes on particular resonance amid the current U.S. economic crisis, with Japan’s 1990s economic policymaking often cited, albeit with varying interpretations, as a case study in what not to do.