November 22, 2023
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Op/ed: Lessons from Japan’s struggle to recover from a post-bubble bout of deflation


By Mohamed El-Erian

Comforted by the notion that “Japan could not happen here,” there was a time when U.S. economists felt confident lecturing the Japanese government on how to pull the country out of its prolonged economic malaise.

However, as I wrote back in 2011, in doing so they severely underappreciated the challenges of post-bubble recoveries. Today they are rightly more timid about criticizing the Japanese, given that the West is still failing to bounce back fully from its own economic lapses, which culminated in the 2008 global financial crisis.

If anything, Japan continues to serve as a teacher for the rest of the world (notwithstanding its unique mix of characteristics, including lousy demographics and limits on labor mobility).

There was another lesson this week when Prime Minister Shinzo Abe decided to postpone a sales-tax increase that, not long ago, was deemed essential for the country’s fiscal sustainability. There is even some talk of cutting corporate taxes next year.

All this follows news of the country’s slip back into recession, which was emphasized by an unexpected contraction of 1.6 percent in the third quarter of the year.

This latest warning siren is particularly relevant for Europe, which inadvertently finds itself heading down the same path as the Japanese as it faces a mix of sluggish growth and a risk of price deflation.

At its core, Abe’s decision to postpone the consumption-tax increase reflects the chaos that prolonged weak economic momentum inflicts on countries wishing to pursue more than one objective — in this case, raising living standards, curtailing the growth in government debt and breaking the private sector’s deflationary mindset.

The move also highlights the difficulty of correcting impediments to growth that have become deeply embedded in the economy.

Remember that early on in his premiership Abe said he would pursue three “arrows” — monetary expansion, fiscal stimulus and structural reforms — to lift Japan out of its two lost decades.

European Central Bank President Mario Draghi has recently advocated similar goals for Europe, stressing the need to move simultaneously on improving both supply and demand measures. With new leadership at the Bank of Japan, Abe has had little difficulty in getting its support of strong stimulus measures.

Yet even with this advantage and with his significant majority in parliament, Abe has struggled in delivering the third arrow — structural reforms.

In calling for an early election in an attempt to extend his term, he is seeking to reassert his political dominance so he can move more forcefully to break down entrenched economic interests.

In the meantime, he is being forced to reconstitute a better mix for his three arrows to ensure that the country’s debt dynamics don’t get out of control.

• Mohamed El-Erian writes for Bloomberg View. Reach him at