In case you haven’t come across it, there is a provocative (if sometimes repetitive) recent book on the Japanese slump by Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Wiley). Koo places the blame squarely on balance sheet problems. Interestingly, the balance sheet problems he emphasises are not in the financial sector but in the corporate (and broader) private sector.
The following passages give a flavour of the argument:
If Japan’s fundamental problem was neither structural nor banking related, was it caused by monetary policy mistakes, as so many academics have claimed? To answer this question, one must look at a peculiar monetary phenomenon of the Japanese economy that is not discussed in any economics textbook or business book. Some readers may think this claim is exaggerated, but Japanese firms have spent the past dozen-odd years paying down debt when interest rates were at zero. (p. 11)
. . .
In summary, the private sector felt obliged to . . . to pay down debt . . .. Disastrous consequences were avoided only because the government took the opposite course of action. By administering fiscal stimulus . . . the government succeeded in preventing catastrophic decline in the nation’s standard of living despite the economic crisis. (p. 25)
Of course, it would be a mistake to exaggerate the similarities between the Japanese and Irish economies. For one thing, the Irish fiscal situation is already dire. But, despite the appreciated efforts to put me straight, I continue to be surprised by how little attention is being given to domestic demand. Improving competitiveness is critical and rightly the focus of much comment, but it will be a drawn out affair. I fear many good enterprises will be destroyed along the way as expenditure switching is dominated by expenditure reduction. How can we avoid an obscenely excessive property boom being followed by an obscenely excessive liquidation?