The global financial and economic crisis is unprecedented in many ways yet not so unique that the experience of other countries is bereft of lessons to be learned. Among the major industrialized economies of the world, Japan's lost decade of the 1990s (what some call Japan's Great Recession ), when it encountered a period of prolonged stagnation caused by the bursting of speculative bubbles and a prolonged banking crisis, is often cited as relevant for policymakers today. The drop in prices on Japan's equity markets combined with a sharp decline in land prices generated losses of about ¥1,500 trillion ($14 trillion) or roughly three times Japan's gross domestic product at that time. As of early 2009, one estimate is that the current global financial crisis may have generated losses in the capital valuation of financial assets world-wide of as much as $50 trillion or about the equivalent of the combined gross domestic product (GDP) of the world. (As equity markets recover, some of these losses may be reversed.) A study by the Joint Economic Committee of Congress concluded that "a series of fiscal and monetary blunders by the Japanese government transformed the inevitable post-bubble recession into a "lost decade" of deflation and stagnation. When the U.S. Treasury planned the $700 billion rescue package (Emergency Economic Stabilization Act of 2008, P.L. P.L. 110-343 ) to address the U.S. financial crisis, it reportedly examined the experience of Japan as that country grappled with its banking crisis in the 1990s. 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). It also demonstrated the importance of strengthening the balance sheets of banks in order for lending to recover and the role of the Deposit Insurance Corporation of Japan in helping to rid the system of "toxic bank assets." 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. Japan financed its fiscal stimuli by relying on issuing new debt. As a result, government debt as a percent of gross domestic product has soared to 167% of GDP. The Japanese experience, combined with that of the Great Depression, has provided a new framework for understanding and analyzing financial crises and policy. Traditionally, economists have viewed the causes of the Great Depression through a macroeconomic lens and have focused on monetary and fiscal policy. In terms of monetary policy, the conclusion of scholars has been that a contraction in the money supply was a primary cause of the length and severity of the Great Depression and that the depression could have been avoided through a more judicious application of monetary policy. This interpretation and its implicit policy recommendations were outlined by Ben Bernanke when he was a member of the Federal Reserve Board in a 2004 lecture on role of the Federal Reserve and of monetary factors in the origin and propagation of the Great Depression. On the fiscal policy side, particularly after the publication of John Maynard Keynes' General Theory of Employment, Interest , and Money , economists have pointed out that the depression ended only after spending for war provided the increase in aggregate demand needed for recovery. In the case of Japan's lost decade of the 1990s, policy analysts advocated expansionary monetary and fiscal policies but also added a microeconomic aspect. They argued that Japan needed to make structural changes in the form of deregulation and privatization of government enterprises in order to make its economy more efficient. For policymakers, the framework for analysis and the lens through which a financial crisis is viewed often provides the rationale for subsequent policy prescriptions. If one believes that misguided monetary policy caused and prolonged the Great Depression, then policy prescriptions tend to focus on actions that will inject reserves into the banking system and increase the supply of money in the economy. If one sees the problem as a lack of aggregate demand, the implicit policy prescription tends to focus on fiscal stimuli. If one believes that the problem is structural—on the supply side—then the remedies tend toward deregulation and economic efficiency. In Japan's case, a study by economist Richard Koo argues that Japan's problem was not completely monetary, fiscal, or structural. He presents evidence that the Japanese economy suffered a "balance sheet recession" and goes a step further by applying the balance-sheet approach to analysis of the Great Depression and the current global financial crisis. He asserts that a balance-sheet analysis explains the problem better than relying on traditional macro- and microeconomic analysis. Koo's premise is that a financial crisis that generates huge losses in wealth (financial assets in particular) causes both firms and households to place priority on repairing their balance sheets. For firms, such a priority implies behavior to minimize debt rather than to maximize profit. For households, it implies increasing savings at the expense of consumption. Under a balance sheet recession, lowering interest rates and increasing the money supply do not generate comparable increases in lending because neither households nor firms are inclined to add more debt until their liabilities are brought more into balance with their lower levels of assets. Under a balance-sheet recession, once monetary policy has reached a limit (zero interest rates), direct government purchases of debt and removing debt from company or household balance sheets tends to be more effective than injecting funds into banks to induce them to lend when potential borrowers are hunkering down and trying to rebalance their assets and liabilities. Also, if households and businesses are not willing to spend, then stimulative fiscal policy may be the next-best option in promoting economic recovery. The London Economist has noted that "history suggests that balance-sheet recessions are long and that the recoveries which eventually follow them are feeble. This report reviews the major actions by the Japanese government in dealing with its crisis and highlights some of the lessons learned from their experience. Like the current U.S. financial crisis, Japan's began with stock market and real estate bubbles. During the latter half of the 1980s, Japan's monetary authorities flooded the market with liquidity (money) in order to enable businesses to cope with the rising value of the yen. Businesses did invest in new capital equipment to become more competitive in international markets, but the excess liquidity also found its way into speculation in Japan's stock market, in real estate ventures, and in foreign investments. At that time, the market value of both land and equities was rising so fast that investors and speculators could hardly miss. Investors tended to ignore risks. The larger mistake for them was not to borrow and invest and consequently not be positioned to reap the returns from rising markets. Banks considered most loans with real estate as collateral as being unquestionably secure. Then the bubbles burst. As indicated in Figure 1 , Japan's Nikkei stock market average had peaked in 1989 (at 40,000) and dropped by 50% in one year and more than 78% (to about 8,700) by the end of 2002. Japan's banks are allowed to hold equities as part of their capital base. The value of the unrealized capital gains on such stock holdings dropped from $355 billion in 1989 to about $40 billion in 2002. This drastically reduced key capital reserves for many banks. Also, by 2000, commercial land values in the six major metropolitan areas had fallen by 80% from their peak level in 1991. Residential and industrial land values also had fallen by nearly 20%. The bursting of this economic bubble caused the value of collateral underlying many bank loans to drop below the value of their loan principal. Also, commercial real estate ventures, especially office buildings, became unprofitable as rents fell. What began as a financial and banking crisis soon caused the overall Japanese economy to slow. As the economy stagnated, companies faced excess capacity, excess inventories, and lower profits. Also as more and more loans turned sour, more and more of the underlying real estate had to be sold at "bargain" prices. In 1995, Japan's banks reported $280 billion in non-performing loans, but this figure turned out to be vastly understated. Unlike the situation in the United States under the current global economic crisis, Japanese financial institutions tended not to bundle and repackage their loans as collateralized debt obligations or rely as extensively on derivatives and credit default swaps. Mortgage defaults in Japan also tended to be on commercial property, not on private residences. The country also had no subprime or Alternate-A loans, but lending in Japan, particularly commercial lending, often was relational (based on connections and relations) rather than being purely market based. Therefore, many commercial loans had been extended partly because of close corporate ties (rather than arms-length due diligence) and turned sour. Before the definition of a non-performing loan was tightened, moreover, Japanese banks often extended small additional loans to borrowers in default in order for the borrower to make a payment of interest and to keep the loan from being reported as non-performing. The adverse effects of the bursting of Japan's real estate and stock bubbles soon spread to the entire economy. Economic growth rates fell from more than 5% per year during the late 1980s to less than 2% per year during the first half of the 1990s with a slight increase in growth in 1996 as the economy began a temporary recovery but then dropped into recession in 1998 and 1999 as fiscal policy tightened and the 1997-98 Asian Financial Crisis developed. Growth remained anemic through the early years of the new century as the recession of 2001 took its toll on Japan too. After 2001, economic growth rates did not recover to their pre-crisis levels.