Abstract

Conventional wisdom among many economists, central bankers, financial journalists and politicians holds that Japan must implement ‘badly needed structural reforms’ (to quote from the Financial Times). ‘No recovery without structural reform’, proclaims Prime Minister Koizumi. Japan’s case is also used to advance similar reforms in other countries and regions, such as Germany, where they have already become a main plank of the government’s policies. Given this overwhelming consensus, it is tempting to assume that the structural reform theory has been thoroughly subjected to empirical tests and found to be clearly supported. However, such empirical examination has so far been lacking. This paper analyses the empirical record and tests the neo-classical theories on which the structural reform case rests. It comes to the surprising finding that there is no factual support for the structural reform argument. Supply-side factors were not responsible for Japan’s recession. An alternative demand-side explanation, focusing on credit creation, is found supported by the evidence.

Keywords

actual growth
capacity utilization
credit creation
potential growth
productivity
structural reform