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Can Japan Make a Comeback?

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  • Arne Bigsten

Abstract

Since the beginning of the 1990s Japan has experienced economic stagnation. The economy had been allowed to overheat in the 1980s and a bubble had been built up. When this burst, there was massive asset-deflation, which led to a banking crisis. The bad debts were not faced up to effectively. Japanese banks could not achieve high enough margins to recapitalise themselves, and the government was for a long time reluctant to intervene effectively. The shock made economic agents more pessimistic, which led to an imbalance between savings and investment-demand. Excess savings were placed abroad and used to finance a domestic fiscal deficit, but this was not enough to close the gap and sustain growth. To be able to run a large current account surplus the yen needed to depreciate, but this was not achieved due to expectations about a future appreciation. The strategy to get out of the liquidity trap would include credible inflation targeting and yen depreciation. Monetary policy should have an inflation target well above zero per cent. Such macroeconomic measures need to be complemented by structural reforms such as deregulation of financial services, competition policy and reallocation of public investments. The Japanese development model with close connections between firms and banks needs to be reformed. Japan should be able to achieve stable growth again, but since the catch-up phase is over one would not expect growth in Japan to be higher than in other developed countries, even if Japan undertakes the needed reforms. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • Arne Bigsten, 2005. "Can Japan Make a Comeback?," The World Economy, Wiley Blackwell, vol. 28(4), pages 595-606, April.
  • Handle: RePEc:bla:worlde:v:28:y:2005:i:4:p:595-606
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    References listed on IDEAS

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    1. Krugman, Paul, 2000. "Thinking About the Liquidity Trap," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 221-237, December.
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    3. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    4. Naoyuki Yoshino & Eisuke Sakakibara, 2002. "The Current State of the Japanese Economy and Remedies," Asian Economic Papers, MIT Press, vol. 1(2), pages 110-126.
    5. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
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    7. Lars E.O. Svensson, 2003. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 145-166, Fall.
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    Cited by:

    1. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2011. "The Japanese economy in crises: A time series segmentation study," Economics Discussion Papers 2011-24, Kiel Institute for the World Economy (IfW).
    2. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2012. "The Japanese economy in crises: A time series segmentation study," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 6, pages 1-81.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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