6 ideas
Japan's weak nominal and real growth stemmed primarily from a rapidly shrinking working-age population and a fall in potential growth, not from insufficiently aggressive monetary policy. Measured per working-age adult, Japan's GDP growth compares favorably with other advanced economies, which undercuts the story that deflation caused the stagnation.
Japan's persistent mild deflation of roughly minus 0.5 percent a year reflected deeper structural forces, among them ageing, weak productivity, and firms' reluctance to raise prices under lifetime-employment wage norms. Blaming deflation for the lost decades reverses the causation, and it leads policymakers to treat the price index instead of the underlying economy.
Ultra-low interest rates and quantitative easing mainly pull demand forward in time, bringing spending and investment from tomorrow into today. When the economy suffers a structural slowdown rather than a temporary shortfall, this borrowing leaves a hole in future demand and brings diminishing returns. Monetary policy cannot raise an economy's underlying growth capacity.
The main danger to macroeconomic stability comes from credit booms and asset bubbles that can form while consumer price inflation stays low and stable. Japan's late-1980s bubble grew during a period of price stability. Inflation targeting on its own can therefore hide the build-up of a crisis.
The belief that a central bank can raise inflation expectations through bold commitments and forward guidance overstates its power over how households and firms form their views of the future. The Bank of Japan's later large-scale experiment under a 2 percent target failed to lift inflation durably. Price expectations in Japan are anchored by lived experience and institutional norms, not by announcements.
Western economists and officials, including figures later at the Federal Reserve, lectured the Bank of Japan that timidity caused its deflation. After 2008, their own economies hit zero rates, slow growth, and weak inflation despite aggressive easing. Japan had been an early case of problems common to ageing advanced economies, not an example of central bank failure.