Exploring the Causes and Remedies of Japanization
Edited by Dongchul Cho, Takatoshi Ito and Andrew Mason
Chapter 2: Japanization: is it spreading to the rest of the world?
Japanization is defined as a combination of (1) a lower actual than potential growth rate for an extended period; (2) a natural real interest rate below zero; (3) a nominal (policy) interest rate at zero; and (4) deflation (a negative inflation rate). A proposed Japanization index measures these conditions. Japan entered this state through (1) its 1990s overkill of the bubble; (2) a nonperforming loans problem resulting in a major banking crisis; (3) failure in engineering a soft landing of the banking crisis; (4) failure to adopt quantitative easing early and decisively to get out of deflation; (5) failure to adopt an inflation targeting regime; and (6) failure to adopt a large fiscal stimulus. Ongoing success of Abenomics in lifting the economy out of deflation shows it is possible to prevent or cure Japanization.
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