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Japan’s Lost Decade: Causes and Remedies

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Japan’s Lost Decade

Abstract

Japan has suffered from sluggish economic growth and recession since the 1990s, a period dubbed “Japan’s Lost Decade.” The People’s Republic of China, many countries in the eurozone, and the United States may face similar problems in the future, and they have been concerned by Japan’s long-term recession. This chapter will address why Japan’s economy has stagnated since the bursting of its economic bubble. Our empirical analysis challenges the beliefs of some western economists, such as Paul Krugman, that the Japanese economy is in a liquidity trap. We argue that Japan’s economic stagnation stems from a vertical investment–saving curve rather than a liquidity trap. The impact of fiscal policy has declined drastically, and the Japanese economy is facing structural problems rather than a temporary downturn. These structural problems have many causes: an aging demographic (a problem that is frequently overlooked), local governments’ overreliance on transfers from the central government, and Basel capital requirements that have made Japanese banks reluctant to lend money to startup businesses and small and medium-sized enterprises. This latter issue has discouraged Japanese innovation and technological progress. The chapter will address all these issues empirically and theoretically and will provide some remedies for Japan’s long-lasting recession.

Another version of this chapter is available as Yoshino and Taghizadeh-Hesary (2016) Causes and remedies of the Japan’s long-lasting recession: lessons for China. China & World Economy 24(2):23–47.

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Notes

  1. 1.

    E Warnock (2012) Japan bill to raise retirement age passes lower house. The Wall Street Journal, 2 Aug. http://www.wsj.com/articles/SB10000872396390443687504577564800240852924

  2. 2.

    Real GDP was stationary with “intercept and trend,” but because the value of the Akaike information criterion with “intercept” was higher compared to “intercept and trend,” we consider the “intercept” result. Hence, this means the variable was also non-stationary in level and stationary in first difference, i.e., I(1).

  3. 3.

    Hometown investment trust (HIT) funds are a new form of financial intermediation that has been adopted as a national strategy in Japan. The name reflects their goal: to connect fund providers with their hometowns. Naoyuki Yoshino, coauthor of this chapter, was one of the earliest proponents of the funds.

  4. 4.

    When Shinzō Abe was elected to his second term as Prime Minister in December 2012 he introduced a reform program called Abenomics. It aimed to revive the sluggish economy with “three arrows”: fiscal consolidation, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competitiveness and economic growth.

  5. 5.

    For more information on the impact of higher energy prices on the economy see Taghizadeh-Hesary et al. (2013, 2016); Taghizadeh-Hesary and Yoshino (2014); and Yoshino and Taghizadeh-Hesary (2014c, d).

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Yoshino, N., Taghizadeh-Hesary, F. (2017). Japan’s Lost Decade: Causes and Remedies. In: Yoshino, N., Taghizadeh-Hesary, F. (eds) Japan’s Lost Decade. ADB Institute Series on Development Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-5021-3_1

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  • DOI: https://doi.org/10.1007/978-981-10-5021-3_1

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