Economic Stagnation in Japan
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Economic Stagnation in Japan

Exploring the Causes and Remedies of Japanization

Edited by Dongchul Cho, Takatoshi Ito and Andrew Mason

Japan’s dramatic transformation from economic success to economic stagnation offers important policy lessons to advanced countries everywhere that are struggling with stagnation. The term ‘Japanization’ is often used by economists to describe long-term stagnation and deflation. Symptoms include high unemployment, weak economic activity, interest rates near zero, quantitative easing, and population aging. In the global context, what can governments do to mitigate the downward trends experienced by Japan? This judiciously timed book investigates in depth the causes of Japan’s ‘lost decades’ versus the real recovery achieved by the United States, and the lessons that can be learned.
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Chapter 9: Deflation and monetary policy

Barry Eichengreen


There is little agreement about deflation as a problem for economic growth and financial stability. Economists may question it as a transitory phenomenon or whether monetary policy can solve it without more serious risks. Historical experience generally confirms that it should be a central-bank priority and does not solve itself. Once deflation is under way, monetary policy can return inflation to positive target levels. If that is not achieved, banks need to do more. If doing more threatens financial stability, macroprudential tools are appropriate. If a central bank runs out of government securities to buy or worries about liquidity in the government bond market, there are other assets to buy. If it worries about purchasing other assets, a helicopter drop of money is an option. If that drop targets productive public infrastructure investments, they not only can proceed without increasing public debt but also can actually reduce it.

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