The cautionary tale of Japan: Why an L-shaped recession is so undesirable

MARY LOUISE KELLY, HOST:

To the ongoing debate now over whether a recession is coming and what type of recession should we be worrying about. Wailin Wong and Adrian Ma, of NPR's podcast The Indicator From Planet Money, introduce us to the L-shaped recession by looking at a country that went through one - Japan.

WAILIN WONG, BYLINE: To understand why an L-shaped recession is so undesirable, we have to look at the different types of recessions. Economists use letter names as a kind of shorthand to describe the shape that results from a graph of a country's gross domestic product over time. By looking at these basic shapes, you can see both the decline and the upturn. Takeo Hoshi is a professor of economics at the University of Tokyo.

TAKEO HOSHI: If the recession doesn't continue, we know it's a V-shaped recovery. If it continues longer, we start talking about U-shaped recovery. And if the economy doesn't recover even then, in several years, we start talking about L-shaped recovery.

WONG: And it's really not much of a recovery at all. This is the problem that plagued Japan during the '90s, and why that period is known as the country's lost decade.

ADRIAN MA, BYLINE: It began in the late '80s with a real estate bubble.

HOSHI: There were lots of anecdotes that suggest the land prices in Japan may be too high.

MA: And, of course, the bubble eventually burst, and what followed in the 1990s was a sort of economic malaise marked with slow growth and also falling prices.

WONG: In other words, deflation. Now, Takeo says that overall, deflation was not a disaster. The Japanese economy was mature. People had savings, and living standards remain high. But the flat or falling prices were part of a bigger, gloomier picture. They signal an economy that had stopped growing.

MA: Japanese companies didn't want to fire workers, so what they did was cut down on new hires.

HOSHI: That was probably the biggest cause of Japanese stagnation. The young people didn't get jobs and were not hired into good jobs.

WONG: Takeo says young people carried the scarring effects of the economic stupor for years afterward.

MA: The Japanese central bank did try to stimulate the economy. It cut interest rates, even taking them down to zero, and it also bought government bonds, a policy that we might know as quantitative easing. And on top of all that, the Japanese government spent massively on public works projects like roads and bridges.

WONG: But demand, spending and borrowing remained stubbornly low. Some economists put the blame on the central bank for not acting more decisively.

HOSHI: So it's a short history, the lost two decades or lost three decades for Japan. It wasn't quite L-shaped. It was a continued failure pulling the economy out of recession.

MA: Takeo says Japan's struggles have influenced the way other countries deal with downturns. Like, here in the U.S., after the dot-com crash in 2000, the U.S. Federal Reserve acted aggressively to cut interest rates because it wanted to avoid an extended Japanese-style recession. And then, several years later, during the financial crisis, the Fed and also other central banks around the world, they used quantitative easing, inspired again by Japan.

WONG: Yep, lessons we have learned from Japan.

Wailin Wong.

MA: Adrian Ma, NPR News. Transcript provided by NPR, Copyright NPR.