What Went Right in Japan

Policy Brief
04-6
November 2004

Japan's Great Recession of the 1990s was the result of fiscal, financial, and monetary policy mistakes cutting off the economy's natural recovery. Economies have a natural tendency to recover from downturns, which is why one speaks of business cycles and why macroeconomic researchers were so interested in Japan's persistent stagnation. It is therefore a pleasure to note how normal the current Japanese recovery is. What changed? There was no structural transformation. The current strong recovery emerged, and has the chance to be ongoing, because the Japanese government got out of the economy's way and did something to recapitalize the banking system.