De-Japanification

Ichiro Suzuki


About ten years ago, in the aftermath of the Global Financial Crisis, some economists came to believe that economies around the world were following the footsteps of Japan. For a generation, Japan has been a forerunner and a trend-setter in the global economy since the burst of the infamous Japan Bubble at the beginning of the 1990s. The burst brought a banking crisis, crushing lenders that were over-extended to the real estate sector. Corporate Japan began fierce consolidation of their balance sheets, divesting non-core assets, reducing investments and piling up cash for fear of running out of funds at a time when banks were no longer reliable suppliers of liquidity. Workforce was axed aggressively in this process. The Bank of Japan responded to the new era of post-bubble retrenchment, by slashing interest rates to nothing, pioneering a creative zero interest rate policy. All those developments that began in the 1990s dramatically suppressed activities in the Japanese economy. Japan has been long leading the world in aging of its population, and that began to take a toll on the economy as well. It did not create labor shortages. There was abundant supply of labor amid dramatic deceleration in the economy. Instead, demand for goods has stalled. An outlook of weaker long-term demand suppressed long-term interest rates, too.


The Global Financial Crisis in 2007-09 and the Great Recession that came with it made the aforementioned economic malaise not limited to Japan. Impaired

banking systems brought down growth rates around the world acutely. The world’s leading central banks, notably the Federal Reserve Bank, reduced interest rates aggressively. Economic activities did not responded to a series of quantitative easing, leading Fed Chairman Bernanke to express publicly about his frustration. It looked that the world was suffering Japan’s malaise, and it came to be called ‘Japanification’..


Persistent weakness of U.S. economy in the first half of the 2010s was attributed in part to insufficient fiscal policies as well as banks that were not adequately capitalized. At Capitol Hill, Congressional Republicans repeatedly blocked any fiscal packages from becoming sufficient for the sake of fiscal integrity. The Fed single-handedly carried the responsibility of keeping the U.S. economy afloat. Chairman Bernanke complained more than a few times on lack of actions from Capitol Hill.


Chairman Bernanke’s wish was granted several years after he left the job, by the novel coronavirus. In the face of unprecedented economic uncertainties, governments around the world reversed their fiscal stance by 180 degrees, handing out cash to voters on a scale never witnessed before. In addition, COVID-19 caused supply chain disruptions that made manufacturers unable to operate the way they used to. Shock waves were felt on the both sides of supply and demand. Chairman Bernanke struggled to bring the inflation rate up to 2%, that was considered as an ‘escape velocity’ from the threat of deflation. He never had it by the time he left the Fed in 2015. Then at the outset of the 2020s, the U.S. economy had it, in fact much more than he ever wished for. Putin’s war in Ukraine turned out to be a nail in the coffin. At above 8% the CPI is running at the highest since the days Paul Volcker was fighting to crush the inflation with his ultra tight monetary policy. Europe is suffering the same ordeal, due to COVID-response fiscal policies and supply chain disruptions that have global effects. The Western world has put the problem of Japanification behind, and had entered an era of de-Japanification. Even Japan is becoming de-Japanificated as the country is putting years of mild deflation behind it. Inflation in japan runs at a modest 2% but it still is a marked progress from decades of struggle to keep prices above zero.

There is one major economy, however, that is still mired in a state of Japanification. That is China. As was the case with Japan in the 1990s and the post-financial crisis U.S. and Europe, debt burden weighs on the economy heavily, after years of relentless accumulation through real estate developments and infrastructure projects. In contrast inflation surges in the West, the CPI rose in China at 2.5% or less over the past two years, though the Chinese economy is still expanding at faster rates than elsewhere, though nothing comparable to its past numbers. The People’s Bank of China (PBOC) is the only central bank that is cutting interest rates, and has had another cut this week.


About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.