In fiscal policy, the Japanese experience has been used both as an example of stimulus packages that did not work and as a rationale for making stimulus packages large enough to help ensure that they would work. In monetary policy, the Bank of Japan's zero-interest rate policy demonstrated the futility of attempting to "push a string" (induce investment and consumer credit purchases through low borrowing rates). The Japanese experience also may be instructive in resolving problems of "zombie corporations" (companies that technically are bankrupt but are being "kept alive" through loans and other financial support), in dealing with nationalization and subsequent privatization of insolvent banks, and in coping with deflation. Origins of Japan's Banking Crisis

Like the current U.S. financial crisis, Japan's began with stock market and real estate bubbles. Japan's Policies to Cope with the Banking Crisis

The bursting of Japan's stock and real estate bubbles in 1989 and 1990 had been induced by the Bank of Japan by a tightening of monetary policy (mainly through increases in interest rates), although it is not clear that the monetary authorities anticipated the severity and depth of the downturn in the economy. Through a combination of capital injections, new laws and regulations, stronger oversight, a reorganization of the banking sector, moderate economic recovery, and several years of banks working off their non-performing loans, the Japanese banking sector eventually recovered. Net Cost of the Bank Rescue Operations

The various bank rescue operations in Japan were administered primarily by the Deposit Insurance Corporation of Japan (DICJ). The annual reports of the DICJ, however, provide detail on the disposition of $399 billion of the $495 billion in funds announced in Japan's financial assistance packages. In 1996, when Japanese authorities thought the recession might be over, attention turned toward "reconstructing government finances" (reducing the budget deficit). This was seen as worsening the economic conditions for the country.
During the 1990s and into the early years of the 21st century, Japan experienced prolonged recessionary economic conditions triggered by the bursting of a bubble in its equity and real estate markets and an ensuing banking crisis. Although the current global financial crisis is much more than Japan's "Great Recession" writ large, many have turned to Japan's experience to either support or oppose various policies and to improve general understanding of the underlying forces of financial crises.
In fiscal policy, the Japanese experience has been used both as an example of stimulus packages that did not work and as a rationale for making stimulus packages large enough to help ensure that they would work. Fiscal stimulus did have the desired economic effect in Japan, but it mainly substituted for depressed bank lending and consumer spending. Recovery had to wait until the balance sheets of banks and households had been rehabilitated. Japan also shifted its policy focus toward reducing its fiscal deficit "too early" after authorities thought the recession had ended in 1996. The ensuing increase in taxes along with reduced fiscal stimulus (along with the 1997-98 Asian Financial Crisis) pushed the economy back into recession. In monetary policy, the Bank of Japan's zero-interest rate policy demonstrated the futility of attempting to induce investment and consumer credit purchases through low borrowing rates. The Japanese experience also may be instructive in resolving problems of companies that technically are bankrupt but are being kept alive through outside financial support and in dealing with nationalization and subsequent privatization of insolvent banks. Japan's case also illustrates that national debt may continue to rise for years after the financial crisis has ended.
With respect to rehabilitating banks, Japan's five bank rescue packages may hold some lessons for the United States. Most of the packages were administered by the Deposit Insurance Corporation of Japan (DICJ). The packages had an announced value of $495 billion. The DICJ reports that it provided $399 billion to Japan's troubled financial institutions of which it has recovered $195 billion. Overcoming the crisis in Japan's banks took a combination of capital injections, new laws and regulations, stronger oversight, a reorganization of the banking sector, moderate economic recovery, and several years of banks working off their non-performing loans. This report will be updated as circumstances warrant.