Japan’s 20 Years in the Dolrums Highlights Need for Effective Recovery Policies


I think a lot of people have the intuition that if you see a bubble followed by a bust and a recession, that the recession is sort of “making up” for the bubble and then soon enough things will snap back onto the righteous middle path. But as Felix Salmon observes this isn’t a real mechanism:

One important lesson, here, is that it’s foolish placing much faith in mean-reversion. There’s still a feeling out there that, yes, we had a few years of bubble and exess, and surely that bubble needs to be popped, but then we can get “back to normal”. Well, it’s been 20 years in Japan since its bubble burst, and it seems further away from recovery than ever.

And note that the only reason Japan’s been able to stabilize its economy after their initial downturn is that there was sufficiently robust consumption growth outside of Japan for the Japanese to have a robust export sector. Now that non-Japanese growth is gone, and they’re looking at a annualized GDP shrinkage of over 12 percent. The Germans, who’ve had a similar-but-not-as-severe situation of slow domestic growth plus robust exports are in a similar situation. The moral of this story is that there’s no extra economy outside of the planet earth that can help stabilize us with export-led growth if the U.S., Japan, China, and the E.U. all fall into simultaneous deep recession. That’s the bulk of world output right there, and everyone else will see the value of the commodities they export drop to nothing. There’s no law of nature that says these problems need to correct themselves—policymakers in the key countries need to do the right thing, and really they all need to do it, or else the whole pattern of global growth really could go L-shaped.