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 12: Avoiding another “lost decade”: what role for fiscal policy?

Jerry Schiff and Ikuo Saito

Abstract

Recent global economic stagnation has stimulated debate about the role of fiscal policy in supporting growth, notably through infrastructure spending. Japan’s experience during its “Lost Decades” provides insights on maximizing the impact of fiscal policy during downturns. First, while Japan provided early and effective fiscal stimulus, later fiscal policy was conducted in a “stop-and-go” and often pro-cyclical manner. Second, a shift in spending away from infrastructure toward transfers reduced the overall fiscal multiplier. Third, a decline in the efficiency of public investment—partly reflecting weaknesses in fiscal institutions—also reduced the impact of fiscal policy. Fourth, the concurrent dramatic shift in demographics reduced potential growth and limited fiscal space, so that fiscal policy was fighting against a strong tide. Avoiding similar problems can help countries design effective fiscal policy responses in the current economic environment.

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