The role of the private sector in Japan’s recovery from the Great Depression

Abstract

Japanese economic thought includes a long debate on the driving forces behind the country’s early and rapid recovery from the Great Depression. Most previous studies attribute the Japanese recovery to expansionary policy measures, but a minority view emphasizes the role of the private sector. This paper, while considering the contribution of the private sector, reassesses the impact of the policy measures on real output and, in turn, on the upswing in the 1930s. The analysis reveals that neither fiscal policy nor monetary policy had a consistent or potent effect on real output, but the private sector, specifically private sector consumption, accounted for a large part of output fluctuations. However, in contrast to previous studies, the response of export shock on output is unclear. The study also shows that the depreciation of the yen had a partly significant effect on output and price levels.