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Japan's Great Stagnation and Abenomics chronicles Japan's Great Stagnation and reveals the striking similarities of economic events and policies between the Great Stagnation and the current Great Recession. It also suggests possible dangers ahead and way-outs in the future.



Chapter 1. Introduction: Once It Happened in Japan

As the world economic crisis continues, people are turning to the Japanese example. Japan was one of the best macroeconomic performers in the world until 1990. Then Japan experienced the bursting of the asset price boom, a financial crisis, and more than a decade of deflation and stagnation. The Japanese episode, known as the Great Stagnation, received much attention during the 1990s and the early years of the 2000s, but the onset of the current crisis invigorated a renewed interest in that episode. Some commentators are even worrying about the Japanization, or Japanification, of the Western countries.1 The prime example was the lead article in the July 30–August 5, 2011, issue of The Economist. Aptly titled “Turning Japanese,” the article featured U.S. President Barack Obama and German Chancellor Angela Merkel wearing Japanese kimonos. The image the news magazine tried to convey was the sense that United States and European political leaders are marred with the same problems as their Japanese counterparts: a lack of leadership, incoherent policy initiatives, and the resultant prolonged stagnation.2 Paul Krugman, the most vocal critic of macroeconomic policy as it is currently practiced all over the world, remarked several times that he should apologize to the Japanese because the Americans were not doing better than the Japanese were. His so-called apology was mere rhetoric for this master debater, but his reference to Japan is more substantial.3

Masazumi Wakatabe

Chapter 2. Thirty Years’ Economic Crisis

This chapter chronicles Japan’s Great Stagnation during 1985–2012, from the Plaza Accord to just before the launching of Abenomics, and analyzes the economic thought of the Japanese policymakers. As see in the following chapters, economists and policymakers are divided on the true causes of Japan’s Great Stagnation, and the debate continues in the present. Broadly speaking, there are two strands of thought, one emphasizing structural factors and the other emphasizing policy failures. The narrative in this chapter emphasizes Japan’s macroeconomic policy failures, since this perspective clarifies the fact that Japan experienced not only exogenous shocks but also a series of mistakes in macroeconomic policy, although other problems, such as the bad loans problem and policy failures in other spheres, are not neglected.1 This perspective could also help us point out more specific problems and draw more specific lessons from Japan’s experiences than another perspective would allow.

Masazumi Wakatabe

Chapter 3. Thirty Years’ Intellectual Crisis

Economic controversies during the Great Stagnation were fiercely fought, and these controversies involved a wide variety of people, from policymakers to academic and business economists, the media, and the general public. As I argue in Chapter 1, any crisis involves that in the existing knowledge and policies, and in the time of an economic crisis, competition emerges among economic ideas. The focus of the controversies changed considerably over time, yet one can discern the recurrence of several dominant ideas. According to Asahi Noguchi of Sensyu University, who meticulously surveyed economic controversies from the late 1980s to the early 1990s, “Upon reviewing the policy discussions during the Great Stagnation, what strikes me is the fact that the same pattern of disagreements has emerged over and over again in a different context” (Noguchi 2005–2006, first installment, 35; Noguchi 2014). That same pattern is the conflict between two contending views of the economy, the structural view versus the macroeconomic view. The structural view seeks out the “deeper” causes of the Great Stagnation, whereas the macroeconomic view considers macroeconomic policy failures as the causes of the Great Stagnation. The structural view further identifies these “deeper” causes with the economic and legal structure of the Japanese economic system, although the precise meaning of the system tends to be elusive.

Masazumi Wakatabe

Chapter 4. The Shadow of History: Lessons from Japan’s Great Depression in the 1930s

The Great Recession has resurrected an interest in another major crisis, the Great Depression. For example, Alan Greenspan talked about the Great Recession as a “once in fifty years, or in a century” event, hinting that the Great Recession is the Second Great Depression (Greenspan 2007). Ben S. Bernake, chairman of the Federal Reserve Board from 2006–2014, and Christina D. Romer, chair of Council of Economic Advisors from 2009– 2010, both foremost experts on the Great Depression, drew lessons from the Great Depression for today’s Great Recession (Bernanke 2012; Romer 2009, 2013). Barry Eichengreen and Kevin O’Rourke explicitly compared the two crises, stating that the initial phase of the Great Recession was more severe than the Great Depression was in terms of declining stock prices and the volume of exports (Eichengreen and O’Rourke 2009). Academic economic historians gathered to discuss the “Lessons from the 1930s Great Depression for the Making of Economic Policy.”1 A similar comparison has already been made during Japan’s Great Stagnation. This chapter goes back further, to the 1930s, showing disturbing similarities between the policy mistakes of the 1930s and those of the 1990s in Japan. The Great Depression is commonly known in Japan as the Showa Depression, named after the years of the reign of Emperor Hirohito. The Showa Depression has acted as a litmus test for Japanese economists, revealing an almost a similar range of diversity of opinions on how economists should deal with economic and financial crises.

Masazumi Wakatabe

Chapter 5. The Future Again? The Assessment of Abenomics

When Shinzo Abe resigned in disgrace in September 2007, no one expected his second coming. Yet he came back with a strong message for the Japanese economy: a policy package commonly known as “Abenomics.”1 The first time, it did not stick, and it was largely irrelevant, but this time, it is sticking, and it is having considerable consequences. Admittedly Abenomics is still in its early stages, and its future is still uncertain, but early signs have been promising. Stock prices have soared: for example, the Nikkei index has increased from ¥8,664 in November 14, 2012, to ¥15,071 in April 3, 2014, while the yen has depreciated from ¥81 per dollar to ¥103 during the same period. The effects are felt not only in financial markets but also in other markets. The real gross domestic product (GDP) growth rate has turned positive. The unemployment rate has decreased from 4.1 percent in November 2012 to 3.8 percent in June 2014. Even deflation has been receding. The change in the consumer price index (CPI), the so-called headline CPI, has increased from –0.2 percent in November 2012 to 3.4 percent in July 2014. The change in the CPI less all foods and energy, the so-called core CPI, has increased from –0.5 percent to 2.3 percent for the same period.2 But, the consumption tax increase in April 2014 poses a great risk to the course of Abenomics. The growth rate has plunged back to a –6.7 percent annualized rate for April to June, and –1.9 percent annualized rate for July to September.

Masazumi Wakatabe

Chapter 6. Concluding Remarks: Beware of Japanization

What lessons should we draw from the whole episode of Japan’s Great Stagnation? Knowing what happened in Japan is the best way to avoid repeating it, and some have already learned the lessons, while others have not. As for the lessons learned, the Federal Reserve Board (FRB) avoided falling into deflation in 2004, and some governments and central banks, after the Lehman shock, tried to avoid deflation. Also, unlike Japan, central banks dealt with the financial panic of 2007–2008 more or less quickly, although the bankruptcy of Lehman Brothers itself and the triggering of the panic are debatable.

Masazumi Wakatabe


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