The Japan Myth

For the second time in a decade, central banks around the world have responded to the collapse of an asset bubble by moving aggressively to ease monetary policy, a tactic explicitly justified by the need to avoid a Japanese-style "lost decade." The problem is, Japan never lost a decade.

BRUSSELS – The first decade of this century started with the so-called dot-com bubble.  When it burst, central banks moved aggressively to ease monetary policy in order to prevent a prolonged period of Japanese-style slow growth. But the prolonged period of low interest rates that followed the 2001 recession instead contributed to the emergence of another bubble, this time in real estate and credit.

With the collapse of the second bubble in a decade, central banks again acted quickly, lowering rates to zero (or close to it) almost everywhere. Recently, the United States Federal Reserve has even engaged in an unprecedented round of “quantitative easing” in an effort to accelerate the recovery. Again, the key argument was the need to avoid a repeat of Japan’s “lost decade.”

Policymaking is often dominated by simple “lessons learned” from economic history. But the lesson learned from the case of Japan is largely a myth. The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6% compared to 1.7 % for the US. The difference is actually much smaller than often assumed, but at first sight a growth rate of 0.6 % qualifies as a lost decade.

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