Forging Ahead, Falling Behind
Chapter 10: ‘Lost Decades?’ Japan’s Political Economy in the New Millennium
It is not our purpose here to provide a detailed macroeconomic or microeconomic analysis of Japan’s economic fortunes since the turn of the century. We identify instead some of the broader changes that occurred within Japan before the dramatic turnaround in the international ﬁnancial and economic climate from 2007–08 onwards to indicate the extent to which the experience of recession and stagnation during the 1990s subsequently affected the content and purpose of the country’s distinctive political economy during the early years of the new millennium. Emerging from the ‘Lost Decade’ The aberration in Japan’s 1990s recession had not been the behaviour of growth – the country had witnessed a series of recoveries aborted by policy errors – but rather the persistence of deﬂation and low aggregate demand. Japan had not been obliged during its ‘lost decade’ to reallocate productive resources across export sectors because prospects there had not fundamentally deteriorated.1 The economy had not collapsed. What proved decisive was the worsening domestic economic situation from 1997, in the midst of a banking crisis, a credit crunch, a widening in the gap between actual and potential output, a curb on the effectiveness of ﬁscal stimulus and falling conﬁdence. It is arguable that by the turn of the century it was too soon to know just how long a shadow the experiences of the previous decade had cast. Nor was it clear whether the lessons of recession and stagnation would usher in fundamental reform rather than a recalibration of the country’s...
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