Recherche FFJ Research Statement Pierre Siklos

Pierre Siklos

The Missing Link(s)?
Fiscal, Demographic, and Global Forces, and Their Interactions with Monetary Policy: Japan Over the Last Three Decades

Le(s) lien(s) manquant(s) ?
Forces fiscales, démographiques et mondiales, et leurs interactions avec la politique monétaire : le Japon au cours des trois dernières décennies




The project examines Japan’s macroeconomic performance over the past three decades relative to the US and the eurozone. Empirically testable hypotheses to be investigated must deal with the role of monetary policy together with demographics, fiscal policy, and institutional factors, as well as changes in the balance of demand and supply shocks.


Le projet examine la performance macroéconomique du Japon au cours des trois dernières décennies par rapport aux États-Unis et à la zone euro. Les hypothèses empiriquement vérifiables à étudier doivent traiter du rôle de la politique monétaire ainsi que de la démographie, de la politique budgétaire et des facteurs institutionnels, ainsi que des changements dans l'équilibre des chocs de demande et d'offre.

Research Statement

The focus of macroeconomic studies on Japan typically are about how the monetary policy authority (viz., the Bank of Japan; hereafter BoJ) navigated various domestic and international economic and financial shocks that have hit the economy over the past three decades. Three unanswered set of questions are being pursue in the planned research.

They are: (1) the role of fiscal and debt policy, and how these combine to exacerbate or mitigate the challenges faced by the central bank to dispel deflationary concerns; (2) the role of demographic changes and spillovers into the design and implementation of fiscal and monetary policies and dictated their aggregate economic impact; and, (3) the role of dissonance between what policy makers and academics in Japan and other advanced economies thought they knew about the Japanese experience and whether this contributed to give economies a false sense of security leading to an under-estimation of the potential for ‘Japanification’.

Since the pandemic of 2020-21 fiscal policy has shouldered a large share of the stabilization policy burden. Monetary policy, including the role of exchange rate fluctuations (e.g., see Belke and Volz, 2020; Thorbecke, 2014), while supportive was ill equipped to deal with some of the critical economic consequences of the health emergency. Moreover, more than a decade of unconventional monetary policy (UMP), combined with ultra-low interest rates, severely blunted its ability to provide further stimulus or a more effective cushion to a major economic downturn. Consequently, the issue of fiscal sustainability, last seriously addressed decades ago, has returned to centre stage. Japan, with its large debt to GDP ratio and persistent deficits, provides a useful example.

Discussions about macroeconomic performance in Japan since the 1990s often highlights its sluggish economic growth and mild deflation. These stylized facts serve to remind readers of the need to avoid following the Japanese example lest we forget what it takes for an economy to fall into the trap of a lost decade. Bernanke (2000) is a well-known reminder of what outsiders thought Japan should have done but there are also plenty of Japanese academics and policy makers who have underscored that mistakes were made (e.g., Wakatabe (2015), and references therein). A more careful examination of the data clearly indicates that interpretations of overall Japanese economic growth are highly sensitive to the metric used (e.g., aggregate or per capita, domestic of US dollar basis). That said, there is little doubt that an inflation rate that has been persistently lower in Japan than in any other advanced economy stands out (e.g., see Kuroda 2016).

There are several areas where the balance of opinion about the Japanese experience is seen as generally unfavorable. They include: (1) whether the mild deflation and stagnation are causally related to each other; (2) whether the Japanese authorities failed to act quickly enough when problems emerged, applied the wrong prescriptions to deal with the crisis, or did not respond aggressively enough to deteriorating economic conditions; (3) whether the proximate sources of negative shocks that hit the Japanese economy were, on balance, from the supply side or the aggregate demand side; (4) whether institutional factors, such as the autonomy of the Bank of Japan, its relationship with the Ministry of Finance and the tasks it was expected to carry out, or its governance, played roles; and (5) once the BoJ launched what has since been referred to as unconventional monetary policy (UMP), whether these met their stated goals and the degree to which these actions were coordinated with fiscal policy.

The jury is out concerning: there is almost a consensus that important elements of (1) and (2) are accurate, considerable differences of opinion exist about the relative importance of supply versus demand shocks (i.e., item (3)), there is some truth to (4), while many see UMP (item (5)) as putting a floor on Japan’s economic slump but were unable to restore pre-lost decades levels of economic performance. There is insufficient space to go into details here but, in addition to the works already cited, one can selectively add Lombardi et. al. (2018) and Shirakawa (2016).

Monetary policy has played a critical role in the story of Japan over the past three decades. Among many Japanese and some non-Japanese authors (e.g., Aramaki 2018, and Posen 1998), fiscal policy was a close second as a candidate explaining the decades of deflation and stagnation. First, the stop-go nature of fiscal interventions in attempts to return to the high growth rates of the 1980s. Second, strategies to manage rising debt levels that threatened, at least in the minds of many policy makers in Japan, to eventually cripple the economy. How monetary and fiscal policy interact in Japan (and elsewhere) has been under-emphasized in large part because fiscal policy has tended to be passive. This is changing and the ongoing pandemic will test the monetary-fiscal relationship as never before.

Additionally, some of the same observers already cited above would comment on the possible role of institutions and their governance as catalysts for what has been perceived to be plodding responses to mounting economic problems. Here, coordination failures and lack of transparency or clarity in the respective roles of critical agencies, at pivotal moments in Japan’s recent economic history, are also believed to have contributed to generating the ‘lost decades’.

More recently, demographic factors have been raised as a contributor to deflation and low economic growth (e.g., Shirakawa 2016). Regulatory forbearance combined with excessive caution hampered the ability of the banking system to contribute to stimulating economic activity. Here, the extant research is far more conclusive (e.g., Siklos, 2021) although the nexus between banking sector performance and the ability of monetary policy to escape from deflation and stagnation has not been fully explored.

Both insiders and outsiders have had much to say, and advice to offer, to policy makers in Japan. However, there is comparatively little discussion of Japanese policy makers’ ability to explain the lessons learned from their experience to outsiders and whether external observers drew different lessons and offered practical alternatives.

The foregoing developments are leading to a rethink of the role played by factors outside ones only associated with the conduct and performance of monetary policy. At the theoretical level, models not specifically aimed at the Japanese experience are being proposed that incorporate some of the long-run factors that are also associated with the secular stagnation phenomenon, demographic factors, the hypothesized decline in the natural real interest rate and now the global and economy-specific impact of the ongoing pandemic (e.g., Brunnermeier et. al., 2020; Eggertsson et. al., 2019). We are also seeing a shift away from thinking that Japanification is exclusively a Japanese phenomenon (e.g. El-Arian, 2019). However, there have not seen comparable theoretical developments in thinking about the place of the central bank when everyone of the foregoing economic forces are at play.

Theories about the role of demographics, fiscal policy, institutional and governance matters, and the impact of the changing balance of demand and supply shocks are only beginning to catch up to empirical work that has, in the past, failed to grasp the nexus that exists between these factors while providing considerable evidence mainly about the role of monetary policy with the other factors mentioned above downplayed, or under-emphasized. Consequently, it is necessary to test hypotheses of the kind outlined above that attempt to deal with these other factors and the proposed research project plans to make a start in this direction. Ideally, this will result in a model that encompasses, in an econometric sense, fiscal, demographic, and structural factors in revisiting of Japan’s experience over the past four decades and assessing the extent to which they differ empirically for the U.S. and the Euro area. To ensure comparability with the existing literature, as well as provide new evidence, a vector autoregressive (VAR) model of some variety – there are, course, many to choose from – for each economy separately versus a model of global variety (e.g., a global VAR or a panel VAR) where cross-economy shocks can be accounted for will serve as the bases for the proposed empirical tests.

Comparisons with these other two systemically important economies is useful as benchmarks for addressing the question “how different is Japan’s experience?” If, as expected, there are significant differences between the three economies, then estimates for the U.S. and the Euro area could serve as counterfactuals to ask how Japan’s economic fortunes might have been different had they followed the same path(s) as in the other two major economies considered. Finally, the fleshing out of the empirically testable hypotheses will also require asking whether it makes sense to treat the three economies in question as ‘islands’ or whether it is empirically preferable to explicitly model economic interactions between the three. It is envisaged that an additional element of the proposed project is to incorporate a more narrative analysis of the outstanding issues described above. This is motivated, in part, by a movement to incorporate more narrative elements in economic analyses (Shiller 2019).


Aramaki, K. (2018), Japan’s Long Stagnation, Deflation, and Abenomics: Mechanisms and Lessons (London: Palgrave Macmillan).

Belke, A., Volz, U. (2020) “The Yen Exchange Rate and the Hollowing Out of the Japanese Industry,” Open Economies Review 31, 371–406.

Bernanke, B. (2000), “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” in Japan’s Financial Crisis and Its Parallels to U.S. Experience, Ryoichi Mikitani and Adam Posen, eds., Institute for International Economics.

Brunnermneier, M., S. Merkel, and Y. Sannikov (2020), “The Fiscal Theory of the Price Level with a Bubble”, working paper, Princeton University, March.

Eggertsson, G., N. Mehrotra, and J. Robbins (2019), “A Model of Secular Stagnation: Theory and Quantitative Evalauation”, American Economic Journal: Macroeconomics 11 (1): 1-48.

El-Arian, M. (2019), “Can Other Economies Avoid ‘Japanification’?” World Economic Forum, 9 April.

Kuroda, H. (2016), “The Battle Against Deflation: The Evolution of Monetary Policy and Japan’s Experience”, at Columbia University, Center on Japanese Economy and Business, 13 April, Bank of Japan.

Lombardi, D., P.L. Siklos, and S. St. Amand (2018), “A Survey of the International Evidence and Lessons Learned About Unconventional Monetary Policies: Is a ‘New Normal’ in Our Future?”, Journal of Economic Surveys 32 (December): 1229-1256.

Posen, A. (1998), Restoring Japan’s Economic Growth (Washington, D.C.: Peterson Institute of International Economics).

Shiller, R. (2019), Narrative Economics (Princeton, N.J.: Princeton University Press).

Shirakawa, M. (2016), “The Impact of Demographic Change: Japan’s Experience and Implications for the US”, Luncheon talk at the “US-Japan Now – Economic Impacts of Ageing”, 7 March, Aoyama-Gakuin University.

Siklos, P. (2021), “Looking Into the Rear-View Mirror: Lessons from Japan for the Eurozone and the U.S.”, Asia and Global Economy 1 (January): 100003.

Thorbecke, W. (2014) “The Contribution of the Yen Appreciation since 2007 to the Japanese Economic Debacle,” Journal of the Japanese and International Economies 31, 1–15.

Wakatabe, M. (2015), Japan's Great Stagnation and Abenomics: Lessons for the World (New York: Palgrave Macmillan).