WORKING PAPER 10-7

The Realities and Relevance of Japan’s Great Recession: Neither Ran nor Rashomon

by Adam S. Posen, Peterson Institute for International Economics

June 2010

Adam S. PosenJapan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.

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Peterson Perspective: Market Volatility in Japan: A Verdict on Abenomics? June 7, 2013

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Speech: Seven Broad Lessons for the United States from Japan’s Lost Decade March 26, 2009

Policy Brief 04-6: What Went Right in Japan November 2004

Working Paper 03-9: It Takes More than a Bubble to Become Japan October 2003

Book: Japan's Financial Crisis and Its Parallels to US Experience September 2000



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