Abstract:
The Japanese economy entered a long recession in spring 1997. Its economic growth has
been much lower than in the US and the EU despite large fiscal stimulus packages, a
monetary policy which has brought interest rates to zero since 1999, injections of public
money to recapitalize banks, and programs of liberalization and deregulation. How could
all these policies have failed to bring the Japanese economy back on a sustainable growth
path? This paper argues that the failure of Japan's efforts to restore a sound economic
environment is the result of having deliberately chosen inappropriate and inadequate
monetary and fiscal instruments to tackle the macroeconomic and structural problems
that have burdened the Japanese economy since the burst of the financial bubble at the
beginning of the 90s. These choices were deliberate, since the "right" policies (in primis
the resolution of the banking crisis) presented unbearable political costs, not only for the
ruling parties, but also for the bureaucratic and business elites. The misfortunes of the
Japanese economy during the long recession not only allow us to draw important
economic policy lessons, but also stimulate reflections on the disruptive role on economic
policies caused by powerful vested interests when an economy needs broad and deep
structural changes. The final part of the paper focuses on ways to tackle Japan's banking
crisis. In particular, it explores the Scandinavian solution, which, mutatis mutandis, might
serve Japanese policy-makers well.
