The lowering of interest rates, monetary easing, capital injections, fiscal stimulus, and problems with ratings agencies, are all problems Japan has been through in the last 10 – 15 years, and all problems the global economy faces now, according to Richard Koo, chief economist at Nomura.
Koo said that if the government decides to de-leverage i.e. minimize its debt at the same time as the private sector, the result would be devastating on an already struggling economy.
In an interview with CNBC, Koo said:
“…When the entire private sector is de-leveraging, you need the government to be in there taking these un-borrowed funds in the private sector and put it back into the income stream. And that’s basically what Japan was doing for the last 15 years.
And from the Japanese perspective, we see the whole world going through the same de-leveraging process after the bursting of the bubble and then you see governments all trying to de-leverage at the same time. And that is not a very good prospect given what we went through.”
Japan of course posted five quarters of negative growth and saw its budget deficit rise at the time. Koo warned euro zone debt ridden countries against repeating Japan’s mistakes, calling for governments to allow fiscal stimulus until the private sector managed to repair its balance sheets.