Causes and Remedies of the Japan's Long-lasting Recession: Lessons for China

Naoyuki Yoshino, Farhad Taghizadeh-Hesary

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

Japan has suffered from sluggish economic growth and recession since the early 1990s. In this paper, we analyze the causes of the prolonged slowdown of the Japanese economy (the lost decade). Economics Nobel laureate Paul Krugman has argued that Japan's lost decade is an example of a liquidity trap. However, our empirical analysis shows that stagnation of the Japanese economy comes from its vertical IS curve rather than a horizontal LM curve, so the Japanese economy has been facing structural problems rather than a temporary downturn. The vertical IS curve is caused by an insensitivity of investment to a lower interest rate partly because of the decline of sales due to the aging population and firms not wanting to invest. The structural problems come from the aging demographic, which is often neglected by scholars and policy-makers, and also from the allocation of transfers from the central government to local governments, and the unwillingness of Japanese banks to lend money to startup businesses and small and medium enterprises (SMEs), mainly because of Basel capital requirements. Many countries, like China, are expected to face similar issues, particularly given the aging population. The present paper will address why the Japanese economy has been trapped in a prolonged slowdown and provide some remedies for revitalizing the economy.

Original languageEnglish
Pages (from-to)23-47
Number of pages25
JournalChina and World Economy
Volume24
Issue number2
DOIs
Publication statusPublished - 2016 Mar 1

Fingerprint

Japanese economy
Recession
Remedies
Japan
China
Aging population
Japanese banks
Interest rates
Economics
Empirical analysis
Liquidity trap
Central government
Business start-up
Demographics
Small and medium-sized enterprises
Stagnation
Basel
Politicians
Local government
Economic growth

Keywords

  • Aging population
  • Japan's lost decade
  • Japanese economy
  • Vertical IS curve

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

Cite this

Causes and Remedies of the Japan's Long-lasting Recession : Lessons for China. / Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad.

In: China and World Economy, Vol. 24, No. 2, 01.03.2016, p. 23-47.

Research output: Contribution to journalArticle

Yoshino, Naoyuki ; Taghizadeh-Hesary, Farhad. / Causes and Remedies of the Japan's Long-lasting Recession : Lessons for China. In: China and World Economy. 2016 ; Vol. 24, No. 2. pp. 23-47.
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