Japan's recovery from the asset bubble burst in 1990 was a slow one and even today Japan's growth rate continues to be disappointing. Economists have questioned the Bank of Japan's policy of low interest rates, the alarming fiscal burden and strong bureaucracy in policy decisions. A combination of the above along with a slowdown in its largest trading partner—the US—has once again raised concerns about the pace of recovery. Lessons are also to be learnt from Japan by the US policy-makers.

US policy-makers today are often haunted by the fears of the Japanese experience of the 1990s. Japan's macroeconomic environment in the second half of the 1980s was a model one with exemplary growth rates and almost non-existent deflation. However, by 1990, the economy moved from boom to bust, which is till today called `the lost decade' of Japan. Although Japan recovered almost after 12 years, its path was slow and even today the growth in Japan is hardly significant. This article seeks to understand the reasons for a slow recovery in Japan and how much the policy-makers are responsible for it. The experience of Japan is also useful in understanding the US economic recession and correct policy actions taken to revive it.

During the 1980s, the monetary policy was characterized by the financial deregulation. The US wanted to enter the Japanese market and coerced the Bank of Japan (BoJ) to lower the interest rates. Due to a healthy economic outlook, the risk premium was at a minimum and credit expanded significantly. The domestic borrowers were allowed to borrow short-term euro-yen loan. The Japanese stock market grew rapidly and an asset bubble started forming. However, as feared, the bubble burst in 1990.

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