Japan's Economy Collapsed in the 1990s.

Not exactly. Decades of extraordinarily high growth in postwar Japan culminated in a huge asset price bubble that reached its peak in 1989. When the bubble finally popped in 1990, wiping out billions of dollars in accumulated wealth, the country's growth rates turned anemic. Between 1990 and 2003 Japan dipped into and out of recession. Despite these troubles, though, Japanese GDP in the 1990s ultimately continued to grow at an average of about 1.5 percent per year, measured in real terms. That translates to a 10 percent increase in the size of the economy over the course of the decade, well lower than the much more robust rates of growth in many other industrialized economies during the same period, but hardly a Great Depression. What's more, unemployment never rose over 5.5 percent -- a rate that would be considered quite an achievement in the United States or Western Europe.

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The Japanese do refer to the 1990s as the Lost Decade, but the label is a bit misleading. Productivity did slide, though not dramatically. If anything was lost in the course of those years, it was the sense of pride and exaggerated confidence that marked the previous era of frenetic growth. Japan lost belief in its own ability to create economic miracles. Yet its economy remained remarkably strong. Japanese automobile companies remained some of the world's most profitable. Japanese consumer electronics manufacturers and machine tool producers continued to post good results despite the rise of low-cost rivals elsewhere in Asia.

The Government Made It Worse by Spending Too Much.

No. Government policy did exacerbate the slowdown, but the picture is much more complicated. Bureaucrats and politicians certainly spent too much on the wrong sorts of things, especially bridge-to-nowhere-style construction projects with limited usefulness. But economists have concluded that large chunks of the spending -- particularly on useful infrastructure, healthcare, and education -- brought substantial benefits. Adam Posen, deputy director of the Peterson Institute for International Economics, has argued that Japan's 1995 stimulus package actually spurred growth the following year. When the government tightened fiscal policy again soon afterward, growth tailed off again. The lesson: Spend, but spend intelligently.

Many students of the period point to other crippling errors. The Bank of Japan maintained high interest rates for too long after the slowdown became apparent. At one point an overly optimistic government raised taxes prematurely, which certainly prolonged the slump.

Policymakers hobbled by a dysfunctional political system dawdled for years when it came to cleaning up zombie companies (bankrupt in all but name) and getting financial institutions to dispose of toxic assets. That failure to take decisive action may have shaved points off Japan's overall growth rates and ended up leaving the country saddled with enormous public debt (peaking at 175 percent of GDP by one recent measure). Yet, a push to force banks to shed their nonperforming loans under the government of Prime Minister Junichiro Koizumi starting in 2001 had notably positive effects on growth.

Japan Has Been Permanently Crippled by the Slowdown of the 1990s.

Hardly. To be sure, Japan has been hit extremely hard by the recent turmoil. At first it looked as though the Japanese economy might have good chances to ride out the crisis better than the United States, because Japanese financial institutions had largely averted the securitized mortgages and dubious derivatives that sent the U.S. economy reeling. But the slump in the United States, China, and Europe -- major markets for Japanese exports -- soon rebounded on Japan with vicious force. In the past few months Japanese exports have collapsed, and growth has nose-dived correspondingly. Japan's economy has been hit much harder than America's.

It's worth noting, though, that this slump comes hard on the heels of the country's longest postwar boom -- a period of growth from 2002 to 2008 that was driven by a strongly performing real economy rather than a credit frenzy.

Even now, Japan is still the world's second-largest national economy. Japan boasts a highly skilled workforce and a powerful array of smart companies. Case in point: Companies like Toyota and Honda have slashed inventories as the demand for cars has plummeted. And yet, drawing on their ample reserves of cash, they've continued their funding of research and development for the next generation of green cars, extending an already formidable lead. When the world's economy picks up again, they'll be perfectly positioned to benefit.

Japanese infrastructure rivals that of any country in the world. The yen remains one of the world's strongest currencies, and Japan remains one of the world's primary creditor nations, a major advantage over the United States, which has chosen to finance its debt externally. One often hears China referred to as America's banker, yet Japan holds almost as much U.S. Treasury debt as China.

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