Political Economy of the Financial Crises in Japan and the United States: A Comparative Study on the Bailout of Financial Institutions

Currently, the United States is suffering from a financial crisis. Japan also struggled with a financial crisis from the late 1990's to the early 2000's. What implications can be drawn from these crisis experiences of the two largest economies in the world? This paper examines which elements are crucial in the use of bailout of financial institutions as a means to address financial crises from the viewpoint of political economy. By analyzing these crises through the balance sheet of financial institutions at stake under the political economic condition of the advanced democratic countries, Japan and the U.S., it became clear that understanding of the taxpayers/opinion leaders and market sentiment are the keystones for a successful bailout of financial institutions. This observation leads to the two central arguments of this paper as the implications of the Japanese and US crises: (1) there is an "effect of learning" from Japanese financial crisis, which helped the U.S. take quick move in addressing its crisis, an effect that should be "crystallized" into economics textbooks in case of future financial crises, and (2) it is significantly important that direct and swift actions are taken by the national leader and his/her secretarial organizations so that the "bully pulpit" (special position of national leader to persuade the public, stemming from President T. Roosevelt's reference to the White House) is effectively utilized to overcome financial crisis.