WASHINGTON — The Federal Reserve acknowledged Wednesday that an economic recovery was under way, but signaled that it was still much too early to start raising interest rates.
In a statement following a two-day meeting by the Fed’s policy makers, the central bank repeated that it would keep its benchmark overnight interest rate at virtually zero for “an extended period.” That almost certainly means until at least some time in 2010.
Lost Decade, here we come.
The Lost Decade (失われた10年, ushinawareta jūnen) is the time after the Japanese asset price bubble's collapse (崩壊, hōkai), which occurred gradually rather than catastrophically.
The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a massive wave of speculation by Japanese companies, banks and securities companies. A combination of exceptionally high land values and exceptionally low interest rates briefly led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.
Recognizing that this bubble was unsustainable, the Finance Ministry sharply raised interest rates in late 1989. This abruptly terminated the bubble, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks being bailed out by the government.
Michael Schuman of Time Magazine noted that banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on further bailouts, which led to an economist describing Japan as a "loser's paradise." Schuman states that Japan's economy did not begin to recover until this practice had ended.