Inside Investment: Japanese lessons
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Inside Investment: Japanese lessons

Much is made of Ben Bernanke’s academic work on the Great Depression. However, the Fed chairman seems to making policy with one eye on the recent Japanese debt deflation cycle.


The drop-out rate from Japanese courses at UK universities is extremely high. Most students take it up from scratch and it proves a challenge too far for all but the most linguistically gifted. Japanese economic history can at least be studied in translation, although it still makes for difficult reading. Vacillation, combined with policy missteps following the pricking of the housing and stock market bubbles in the early 1990s, condemned Japan to a debt deflation cycle not seen in a developed economy since the Great Depression. The country is only now beginning to recover.

Central bankers looking for a guide of what not to do in the present credit crunch and economic slowdown could do worse than turn their attention to what unfolded in Japan. Fortunately for the US and the rest of the world, Federal Reserve chairman Ben Bernanke appears to be a keen student. The lessons are many and varied. The biggest single mistake the Japanese authorities made was to stay within a traditional monetary mindset for far too long. This lack of imagination was compounded by the catastrophic decision to raise interest rates in 1998, tipping the economy into a vicious deflationary spiral.

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