Japanization: Is it Endemic or Epidemic?

Takatoshi Ito

NBER Working Paper No. 21954
Issued in February 2016
NBER Program(s):International Finance and Macroeconomics

Japanization is defined as a combinations of the following economic conditions: (1) the actual growth rate is lower than the potential growth rate for an extended period; (2) the natural real interest rate is below zero and also below the actual real interest rate; (3) the nominal (policy) interest rate is zero; (4) deflation, i.e., negative inflation rate. As a summary measure for these conditions, the Japanization index, the sum of proxy for GDP gap, inflation rate and the nominal interest rate, is proposed. The growth rate, the inflation rate and the nominal and real interest rate has been declining since 1990. Since 2009, major advanced countries have shared conditions (1)-(3). Only Japan has experienced a prolonged period of (4) deflation. A closer examination of how Japan got into the Japanization state reveals that it is a combination of (a) a hard-landing of the 1990-92 bubble; (b) not dealing with non-performing loans problem promptly and decisively, resulting in a major banking crisis; (c) the absence of a soft landing after the banking crisis; (d) the lack of quantitative easing policies when deflation first occurred; (e) the absence of an inflation target; and (f) the absence of timely, large scale fiscal stimulus. The fact that Abenomics—a mix of aggressive monetary policy, combined with a 2% inflation target and fiscal stimulus—in lifting the economy out of deflation shows it is possible to prevent or cure Japanization.

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Document Object Identifier (DOI): 10.3386/w21954

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