As the United States and other major countries prepare to combat the threat of deflation and recession with interest rates fast approaching zero, a five-year policy experiment in Japan shows how important it is to act quickly and boldly.<\/p>\n
Japan fought its way out of deflation after a property and stock bubble burst in the 1990s with quantitative easing, a policy measure that involved flooding banks with far more cash than was needed to keep short-term rates at zero.<\/p>\n
It was a groundbreaking experiment and took a long time to work because the Bank of Japan was slow to employ the entire gamut of policy options and spell out its goals in credible fashion.<\/p>\n
These lessons are now acquiring a special relevance to the U.S. Federal Reserve, facing the risk of a Japan-style deflationary spiral after a mortgage market meltdown that battered the banking system and resulted in the worst bear market for stocks since the Great Depression.<\/p>\n