The Realities and Relevance of Japan's Great Recession: Neither Ran Nor Rashomon

Abstract

Japan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes-but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery. JEL Codes: E31, E62, E63, O53

The Soft Tyranny of Inflation Expectations

“…It came instead from an excessive desire to ‘normalize interest rates from historically loose conditions’ (roughly translated), an unfounded fear of asset price bubbles quickly re‐emerging following a banking crisis, and a disregard for cyclical economic conditions (and their impact on prices). That 2000 decision led to bad macroeconomic outcomes, a rapid reversal of policy back to ease, and a significant blow, in my opinion, to the credibility of those policy makers then in charge that further de‐anchored Japanese inflation expectations towards deflation (Posen ). Similar mistakes were made in more extreme form by the Federal Reserve and a number of European central banks in the 1920s and 1930s.…”

“…This is consistent with the fundamental starting point of the MPC's May 2011 forecast (Bank of England ) – as well as with the results of mainstream empirical economics (Meier ; Posen ; Stock and Watson ) – that in the aftermath of the recession and financial crisis, there is still an output gap in the United Kingdom, and that the output gap is pushing down on inflation. Economists, including members of the MPC, can have different estimates over some range for the size of the current UK output gap and what the trend rate of productivity will be when that output gap closes, but do agree on this starting point that the gap is greater than zero and that most of trend productivity growth will return (Bean ; Dale ; Posen , b, c; Weale ; King ). Obviously, there is more to generating a specific forecast distribution of inflation than just that, including estimating parameters, respecting adding up relationships, considering the transmission of current monetary policy settings to credit markets, and making judgements about investor and consumer behaviour.…”

Влияние Тенденций Развития Экономики На Промышленные Кластеры

“…Авторы ука-зывают на ошибки в бюджетной политике, а именно на недостаточное использование государственных расходов посредством увеличения заимствований на финансовых рынках, что и привело к попаданию в «дефляционную ловушку» [12,10].…”

Why Do Prices Remain Stable in the Bubble and Bust Period?

“…1 The inflation rate of final goods (domestic products for domestic demand) was −0.2% during the pre-bubble era, −0.7% during the bubble era, and −1.0% during the lost decade. Interestingly, as Posen (2010) and Bank of Japan Governor Shirakawa (2010) note, deflation stayed at moderate levels even at the bottom of the recessions. This relative unresponsiveness of prices to cyclical fluctuations remains a puzzle.…”