Japan's Lost Decade: What Have We Learned and Where are We Heading?
18 Pages Posted: 5 Nov 2007
The lost decade has provided us a number of lessons. One of them is the limit of standard macroeconomics. This paper attempts to show that uncertainty plays a much more important role in the macroeconomy than most economists recognize. Once the economy is caught in an uncertainty trap, the effectiveness of standard policy necessarily weakens. The zero-interest rate may well be a consequence of an uncertainty trap. In fact, whether or not the economy is caught in such an uncertainty trap distinguishes 'depression' from the normal cyclical 'recession'. The significance of demand-creating innovation is another point I emphasize in this paper. In my view, a lack of demand-creating innovation is a part of explanation of the lost decade. At the same time, this paper offers prospects for the future of the Japanese economy.
Suggested Citation: Suggested Citation