Japan’s economic and financial malaise once was thought to have little relevance for other advanced economies. Respected Western economists and policy makers even argued that “Japan couldn’t happen here.”
But developments in recent years have led to a more humble attitude that recognizes the importance of understanding Japan’s experience, past and present.
Here are five of the big insights:
1) It is not easy to decisively break out of a growth slump associated with the bursting of a financial bubble. The longer an economy is stuck in a low-growth regime, the greater the structural headwinds impeding an economic liftoff. This affects not just the current growth trajectory, but future potential, too.
Early in the last decade, the consensus view in the West was that Japan’s “lost decade” of economic growth easily could have been avoided had Japanese policy makers adopted more timely stimulative monetary and fiscal measures. And when the West slipped into recession after the global financial crisis, this view contributed to the willingness of central banks in Europe and the U.S. to adopt a “whatever-it-takes” approach.
Yet despite previously unthinkable and unconventional monetary measures by the European Central Bank and the Federal Reserve, neither Europe nor the U.S. has been able to achieve growth escape velocity.
2) Not long ago, deflation was unlikely to make the list of the 10 big economic risks to Western countries. As a result, few thought that these economies had anything to learn from Japan’s multi-decade battle with falling realized prices, entrenched expectations of low future inflation and the resulting headwind to consumption and investment. This is no longer the case.
Falling prices are among the ECB’s top concerns, as well as the frequent impetus for increasingly experimental measures, including negative nominal interest rates. Deflation also features among the risks the Fed is taking into account, though to a lesser extent.