Turning Japanese? Lessons from Japan’s Lost Decade to the Current Crisis

Abstract

As the world economic crisis continues, people are turning to the Japanese example. Japan has experienced the burst of the Bubble economy, financial crisis, and more than a decade-long deflation and stagnation known as the Lost Decade. Some commentators are even suggesting the Japanization of the Western countries. The paper focuses mainly on the economic controversies and debates during the Great Stagnation from the mid-1980s to the early 2000s along with a brief description of the Japanese economy characterized by a series of macroeconomic policy mistakes. It is true that there are some distinct differences between Japan and the other countries including their academic economics culture and initial policy responses to the financial crisis. However, there are certain similarities: the discussions became more and more divisive and heated as the crisis continued; economists turned to more “structural causes” of the stagnation, as the crisis prolonged; the effectiveness of macroeconomic policy became increasingly questioned and the old ideas such as liquidationist thinking has returned. It is in the confusions and mistakes that one can see the clear case for lessons to be learned from the Japan’s Lost Decade. ∗ I have benefited from the generosity and hospitality of the Center on Japanese Economy and Business, Columbia University, during my stay at the summer of 2012. The paper was read at the 3rd joint ESHET-JSHET conference held at Corte, Corsica, France on September 12-15, 2012. I appreciate helpful comments from the participants, particularly Professor Hans-Michael Trautwein. I would also like to thank the Japan Society for the Promotion of Science (Grant No. 22530199) for indispensable financial assistance. Translations from the Japanese materials are my own.