Japan’s Borrowing Trauma Could Haunt It for Years: Economist

Japan will have to make "huge" efforts to get its economy moving again, the chief economist of Nomura Research Institute told CNBC, warning that the process could take years.

"It's going to take a while before things normalize," Richard Koo said at the Ambrosetti Workshop in Italy. "It took the Unites States 30 years to bring interest rates back up to 4 percent…with massive fiscal stimuli in between…to get people off that trauma. In the Japanese case we are in the 22nd year but still no sign that interest rates will normalize anytime soon."

He said that Japan's greatest problem was a lack of private sector borrowers, and argued that the Japanese government needs to put in place stimulus measures to try to encourage companies to borrow. He said there was already enough liquidity in the Japanese banking system to increase money supply five times, but pointed out that the private sector was simply not borrowing.

Japan suffered an asset price bubble at the end of the 1980s and experienced a period that is referred to as "the lost two decades". Koo said that it took Japanese banks 15 years to repair their balance sheets.

"The bank of Japan can put all the liquidity in the system, but the liquidity cannot come out of the banking system, because there are no borrowers," Koo said.

"When the government is going to borrow the money, get the money out of the banking system, actually spend it, get the economy moving," Koo said, "and within the same fiscal pillar trying to encourage Japanese companies to borrow by giving additional investment tax credits, the kind of package that Obama put in for 2011. That's the kind of package Japan really needs."

Comparing the current challenges of the U.S. to Japan's experience, he said the United States has a balance sheet problem similar to Japan's 15 years ago.

"The U.S. private sector is saving 6-7 percent of GDP at zero interest rate. This is a crazy world," he exclaimed.

Koo said he would much prefer to see infrastructure spending to tax cuts, as it has an immediate impact and can be ended when the project is over, while taking away tax cuts is difficult.