Japan's Lost Decade: Lessons for Other Economies

31 Pages Posted: 14 Apr 2015

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Farhad Taghizadeh Hesary

Waseda University

Date Written: April 13, 2015


Japan has suffered from sluggish economic growth and recession since the 1990s, a phenomenon 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 future and they have been concerned by Japan's long-term recession. This paper 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 IS curve rather than a liquidity trap. The impact of fiscal policy has declined drastically, and the Japanese economy faces structural problems rather than a temporary downturn. These structural problems have many causes: an aging demographic (a problem that is frequently overlooked), an over-reliance by local governments 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 paper will address all these issues empirically and theoretically and will provide some remedies for Japan's long-lasting recession.

Keywords: japan's lost decade, liquidity trap, japanese economy, economic stagnation, japanese innovation and technical progress

JEL Classification: E12, E62

Suggested Citation

Yoshino, Naoyuki and Taghizadeh Hesary, Farhad, Japan's Lost Decade: Lessons for Other Economies (April 13, 2015). ADBI Working Paper 521. Available at SSRN: https://ssrn.com/abstract=2593714 or http://dx.doi.org/10.2139/ssrn.2593714

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008

Farhad Taghizadeh Hesary

Waseda University ( email )

1-6-1 Nishi-Waseda,
Shinjuku, Tokyo 169-8050

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