How have inflation-control policies affected Japanese economy in the long rung and are there real

basis to the argument that similar faith could face Western Economies?

In the 1980s, Japan’s economy was in a boom and at the top of the world. While the United States
grew at an annual rate of 3.07%, Japan’s economy was growing at an average rate of 3.89%. Quickly
after however, in the 1990s, Japan’s economy was met with difficulties. This era of difficulties is
known to us as ‘Japan’s Lost Decade’.

The period of economic stagnation and price deflation lasted from 1991 to 2001. This period
consisted of the Japanese suffering from both a liquidity trap as well as a credit crunch. Post-1989,
its GDP growth didn't average more than 1.2% annually and the stock market remained low, falling
more than 75%. Wages fell and asset prices shrank, especially land prices. The country's real estate
bubble burst in the fall of 1989, with land prices falling throughout the 90s, declining more than 80%
by 2002.

The Lost Decade did have monetary roots. The main causes of this economic slowdown were raising
interest rates that set a liquidity trap while a credit crunch was unfolding. It took 12 years for Japan's
GDP to recover to the same levels as 1995. From 1991 to 2003, the Japanese economy, as measured
by GDP, grew only 1.14% annually, well below that of other industrialized nations. And as a greater
sign of economic malaise, Japan also fell behind in output per capita.

Since 1990, Japan has recorded average annual real growth of 0.8 per cent and inflation of 0.4 per
cent. The Nikkei index never again came close to that December 1989 peak. Today it stands at
25,907. In dollars, per capita incomes in Japan are a third lower than in the US.

Japan had little growth mainly due to exports. That won’t work when every major economy in the
world is in the same position. American and European economists worry as we are approaching the
Japanese economic scenario, because of slow economic growth, interest levels dropping to their
lowest levels, as well as low inflation rates. Particularly in Europe, where growth predictions have
been continually revised downwards with a repeated quantitative easing policy which did not trigger
further inflation. “What had been regarded as Japanese problems are now faced more or less by
Europeans,” says Hiroshi Nakaso, the former deputy governor of the Bank of Japan. “I’m not saying
I’m convinced Europe will follow Japan’s path, but Japan’s experience certainly offers hints.”

We can still, however, observe major differences between Europe's and Japan’s economies. Europe
displays a higher inflation rate than Japan and never reached a level of deflation, measured yearly,
while Japan has encountered this scenario 12 times since 1991. The major lessons economies can
take from Japan’s Lost Decade include using available public funds to restructure banks' balance
sheets and that sometimes the fear of inflation can cause stagnation. According to Robin Harring and
Chris Giles, Japan is currently the best case study of what happens in an environment of persistent
low inflation and interest rates. This is a situation which much of the developed world may face in
the aftermath of the Covid-19 pandemic.

To conclude, despite recent negative economic news for Japan due to the coronavirus effect, the
situation of the Japanese and European economies might not be as dramatic as some say. Both are
among the top largest economies in the world, with high levels of education, productivity and a well-
functioning democratic system. Even though Europe displays similar economic trends as Japan, many
economists still believe it is possible to combat Japanification. The good news of the situation is that
it will spread slowly. The bad news, however, is that it will end slowly, too.
Resources:

Economics, T. S. of. (n.d.). Backstage: Japan's inflation problem and monetary policy options.
Bruegel. https://www.bruegel.org/2018/10/backstage-japans-inflation-problem-and-monetary-
policy-options/.

Harding, R., & Giles, C. (2020, November 23). Lessons from Japan: Coping with low rates and inflation
after the pandemic. Subscribe to read | Financial Times. https://www.ft.com/content/da9086f7-
bfa5-4d1c-83d0-bea5fe41945d.

Mauldin, J. (2019, April 18). The global economy looks disturbingly like Japan before its 'lost decade'.
Forbes. https://www.forbes.com/sites/johnmauldin/2019/04/18/the-global-economy-looks-
disturbingly-like-japan-before-its-lost-decade/?sh=2ef8a6576e5c.

Nielsen, B. (2021, August 22). The lost Decade: Lessons From Japan's real estate crisis. Investopedia.
https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp.

Raising the Inflation Target: Lessons from Japan. The Fed - Raising the Inflation Target: Lessons from
Japan. (n.d.). https://www.federalreserve.gov/econres/notes/feds-notes/raising-the-inflation-target-
lessons-from-japan-20200108.htm.