Forging Ahead, Falling Behind
Chapter 6: Funding a Recovery: The Impact and Fate of Fiscal Policy, 1990–97
JOBNAME: Garside PAGE: 1 SESS: 9 OUTPUT: Wed Jun 27 12:09:56 2012 6. Funding a recovery: the impact and fate of ﬁscal policy, 1990–97 Japan’s recession during the early 1990s was – and is – commonly regarded as being rooted in the troubled ﬁnancial sector. An article published in the Nihon Keizai Shimbun newspaper on 6 December 1993 stated: ‘The current recession is a combination of the cyclical downturn following the collapse of the bubble and a structural slump due to anxiety regarding the ﬁnancial system. The source of the problems lies in banks’ bad debts. The banks that are burdened by these nonperforming loans are adopting a cautious lending attitude. While the banks deny it, there is a strong discontent concerning the credit crunch, especially among small and medium enterprises.’1 Such explanations are, however, insufﬁcient to account for either Japan’s continuing recession during the early 1990s or the more worrying slide into stagnation and deﬂation from 1997.2 Fluctuations in investment and aggregate demand played a determinant role. The duration and amplitude of rises in investment in Japan in the 1990s were smaller and the declines much deeper and longer than in earlier cycles, as Figure 6.1 below shows. In consequence, average investment for the decade was much lower and a cause of slower growth.3 From our perspective it is the link between growth, investment and aggregate demand from the mid-1980s that is particularly important. By then Japan had reached the technological frontier, as deﬁned by...
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