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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.

Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.
Adrian Ma covers work, money and other "business-ish" for NPR's daily economics podcast The Indicator from Planet Money.