野村-为何日本难以实现货币政策正常化-Why Japan is struggling to normalize monetary policy-20260915

SeeAppendixA-1fordisclaimers.

【价值目录】

NOAURA

RichardKoo

15September2026

WhyJapanisstrugglingtonormalizemonetarypolicy

TheBankofJapan'sdelaysinnormalizingmonetarypolicyarebecomingamajor

issue,andtheUS,whichchairedtheG20FinanceMinistersandCentralBank

GovernorsMeetingheldinAshevilleon31August-1September,haspubliclycalledonJapantoaddressit.

Inresponsetothesecalls,theBOJlookslikelytoraiseinterestratesatitsMonetary

PolicyMeetingthisThursdayandFriday.Nevertheless,fullpolicynormalization

remainsadistantprospect,andthisislikelytoremainakeyissueforJapan'seconomyandfinancialsector.

Japan,ofcourse,isafullysovereignnationandisundernoobligationtofollow

instructionsfromtheUSoranyothercountry.However,thedelaysinnormalizing

monetarypolicyarealsohavingasubstantialimpactonthedomesticeconomy.BelowIwouldliketoconsiderwhyitisonlyJapanthatfacesthisproblem.Othercountries

alsoimplementedunconventionalmonetaryeasingpoliciessuchaszerointerestratesandquantitativeeasing(QE),buttheydonotfindthemselvesinasimilarquandary.

Problembeganwhenmonetarypolicystoppedworkingafterbubble'scollapse

Inmyview,theimmediateoriginofthisproblemliesintheBOJ'sdecisionin2013topursuemonetaryeasingonan“unprecedented”scaleunderthefirst“arrow”of

Abenomics.However,theconditionsthatledthecentralbankdownthispathhaveactuallybeeninplaceformorethan30years.

Inthemid-1990s,theJapaneseeconomyshowednosignsofrecoveryeventhoughtheBOJhadtakenitspolicyratealmostdowntozero.Andfiscalpolicy,whichhadsupportedtheeconomyinthepast,failedtoperformitstextbookpump-priming

function.Meanwhile,Japan'sgovernmentdebtsurpassedItaly'sasapercentageofGDP,makingitthemostindebtednationintheG7.Thissparkedamajordebate

amongpoliticiansandeconomistsovertheappropriatecourseofaction.

Economistsproposedtwobroadpolicyapproaches.Onearguedthatstructural

problemswereresponsiblefortheeconomy'sfailuretorespondtoconventionalfiscalandmonetarystimulusandthatJapanneededstructuralreformssimilartothose

implementedbyUSPresidentRonaldReaganinthe1980s.

Atthetime,economistssuchasHiroshiKatoarguedforcefullythatconventional

policieswereineffectivebecause“thepipeswereclogged”andthatstructuralreformswereneededtoremovetheobstaclesstandinginthewayofgrowth.

RichardKooischiefeconomistat

personalview.

NomuraResearchInstitute.Thisishis

RichardKoo

r-koo@nri.co.jp

Toreceivethispublication,pleasecontactyourlocalNomura

representative.

JapaneseversionpublishedonSeptember14,2026

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Wasmonetaryeasingineffectivebecauseitwasnotsufficientlyaggressive?

Theotherargument,advancedbytheso-calledmonetarists,wasthattheeconomywouldquicklyimproveifonlytheBOJeasedmonetarypolicymoreaggressively.

ThislineofreasoningstemmedfromProfessorMiltonFriedman’snotionthat“droppingmoneyfromhelicopters”wouldimmediatelyboosttheeconomy.InJapan,thisapproachwasadvocatedbypeoplelikeKoichiHamadaandMasazumiWakatabe,whileoverseasproponentsincludedsuchprominenteconomistsasPaulKrugmanandBenBernanke.

Theywerefullofconfidenceatthetime.Mr.Bernanke,thenaFederalReserveBoard

governor,wentsofarastocallBOJofficialsfoolsforfailingtotaketheaggressiveactionheandhiscolleaguesadvocated.Mr.Hamada,aYaleUniversityprofessor,even

publishedabookin2012titled“AmericaKnowsJapan’sEconomyWillRevive”(inJapanese).

In1999,IdebatedMr.KrugmanformorethananhourwhenhecametoJapanonatriparrangedbypublisherBungeishunju.Forthefirst40minutes,however,hemerely

repeatedhiscriticismoftheBOJ’sincompetenceandrefusedtolistentomybalancesheetrecessiontheory.

Ineverthelessstoodmyground,arguingthatmonetarypolicylosesitseffectiveness

whenprivate-sectorbalancesheetproblemscausebusinessesandhouseholdstostopborrowing.Heeventuallybecamesomewhatmorereceptivetomyargument,butitwasonlyaftertheUSitselfenteredabalancesheetrecessionfollowingthecollapseof

LehmanBrothersin2008thatheacknowledgedmytheory,whichatthetimewasentirelynew.

MonetaryeasinggrewmoreaggressiveunderAbenomics,but…

Underpressurefromeconomistsadvocatingstructuralreformandaggressivemonetaryeasing,thegovernmentandtheBOJpursuedbothapproaches.TheKoizumi

administration,whichtookofficein2001,madestructuralreformitsflagshippolicy,whiletheBOJunderGovernorMasaruHayamilaunchedtheworld’sfirstQEprogramin2001

asaformofaggressivemonetaryaccommodation.

Atthetime,however,Japan’sprivatesectorwaspreoccupiedwithrepairingbalance

sheetsleftunderwaterbythecollapseofadebt-financedbubble,whichhaddriven

commercialpropertypricesacrossthesixmajorcitiesdownanaverageof87%from

theirpeak.Asaresult,theprivatesectorhadnocapacitytorespondtoeitherthe

government’sstructuralreformsortheBOJ’sQE.Thefiscalmeasuresnotedabovewereinitiallyeffectivebutfailedto“primethepump”preciselybecauseprivate-sectorbalancesheetswereincrisis,leavingbusinessesandhouseholdsunabletoleveragethefiscal

stimulus.

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Fig.1:FlowoffundsinJapaneseeconomy

Financialsurplusordeficitbysector

15

12

9

6

3

0

-3

-6

-9

-12

-15

(as%nominalGDP)

(Financialsurplus)

Households

Restoftheworld

Corporatesector

(non-financialsector+

financialsector)

GlobalFinancialCrisis

Pandemic

Generalgovernment

BalanceSheetRecession

(Financialdeficit)

8183858789919395979901030507091113151719212325

Privatesector

savings:

6.85%ofGDP

Note:AdjustedfortheimpactofthetransferofdebtrelatedtotheJapaneseNationalRailwaySettlementCorporationandtheNationalForestServiceSpecialAccount(inFY98)andtheprivatizationofJapanPost(inFY07).Figuresfromend-1998onwardarefour-quartertrailingaverages,mostrecentdataisforfourquartersthroughJan–Mar2026.

Source:NomuraResearchInstitute,basedonBankofJapan,FlowofFundsAccounts,andGovernmentofJapan,CabinetOffice,NationalAccounts

Japan’scorporatesectorintheearly2000swasactuallyrunningafinancialsurplus(=

excesssavings)approaching10%ofGDP,anunprecedentedstateofaffairsatatimeofzerointerestrates(Figure1).

Ordinarily,companiesborrowandspendmoneysavedbyhouseholdsandthuskeeptheeconomyrunning.After2000,however,Japan’scorporatesectorbecameanevenlargernetsaverthanthehouseholdsector—anextraordinaryanomaly.Moreover,debt

repaymentsaccountedformostofthisfinancialsurplus.Bothofthepoliciesdiscussedabovethereforeprovedineffective,andJapan’seconomycontinuedtostagnate.

Atthispoint,policymakersshouldhaveconcludedthattherecessionoccurredbecausetheprivatesectorwasfacingbalancesheetproblemsandhadchosentominimizedebtratherthanmaximizeprofits,andthatrestoringgrowthundersuchcircumstanceswouldrequirethegovernmenttocontinueborrowingandspendingtheexcesssavingsoftheprivatesector.Butthiswasnottheconclusiontheycameto.

Instead,thesecondAbeadministration,whichtookofficeinDecember2012,declareddeflationtobe“therootofallevil”and,viaAbe-appointedBOJGovernorHaruhiko

Kuroda,pressedaheadwithanunprecedentedprogramofmonetaryeasingthatwasdescribedasbeingona“differentdimension.”

Monetaryeasingcannotworkunlessitleadstocreditcreation

GrowthandinflationinJapanremainedsluggishdespitetheseeffortsbecausedeflationwasaconsequenceofthebalancesheetrecession,notitscause.Insucharecession,pricesstagnatebecauseofinsufficientdemand.Thedemandshortfallarisesbecause

theprivatesectorisdesperatelyrepayingdebttoreduceitsliabilitiesandincreasing

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savingstobuilditsassetsinanattempttorepairbalancesheetsleftunderwaterbythecollapseofthebubble,leavinglittlemoneyforconsumptionandinvestment.

Asaresult,theprivatesector’sfinancialsurpluspeakedat11.1%ofGDPinJan–Mar

2004(Figure1).Ifsomeoneinanationaleconomyissaving,someoneelsemustborrowandspendthosesavingsorelseadeflationarygaparisingfrominsufficientdemandwillemerge.Leftunaddressed,thiswillweakentheeconomyand,ifsufficientlysevere,willalsodepressprices.

Moreover,aprivatesectorthatisdesperatelytryingtoemergefromastateofnegativenetworthcannotstopminimizingdebt—whichisanurgentandappropriateresponsetothatsituation—nomatterhowfarthecentralbanklowersthepolicyrateorhowmuch

liquidityitsupplies.

Asaresult,businessesandhouseholdswithnegativenetworthrefusedtoincreasetheirborrowingnomatterhowaggressivelytheBOJacted.Ineveryeconomythat

experiencedabalancesheetrecession,includingEuropeandtheUSafter2008,lendinggrowthremainedsluggishandentirelyunresponsivetopolicyinitiativesevenascentralbankstookinterestratesdowntozeroandimplementedQE.

Theright-mostcolumninFigure2showsthecoefficientsofdetermination(R²)forsimpleregressionsofy-ygrowthinbanklendingony-ygrowthinthemonetarybasesupplied

bycentralbanks(basedonmonthlydata).ThecoefficientsforJapan,theUS,theUKandtheeurozoneareverylowindeed.

Fig.2:Monetarypolicyeffectivenessdeclinessharplywhenprivatesectorseekstominimizedebt

R2

(y-ychanges**)

Monetarybasegrowthfrom2008*

Banklending

growthfrom2008*

US

525%

103%

0.166

Japan(I)

523%

62%

0.021

(II)*

1409%

64%

0.003

Euroarea

341%

29%

0.042

UK

868%

18%

0.012

SouthKorea

Taiwan

496%

260%

172%

152%

0.534

0.457

Almostnocorrelation

Strong

correlation

Note:*RatesofgrowthforJapan(II)arefrom1990onward.**Basedonasimpleregressionusingy-ychangesintheindexedseries.

Source:NomuraResearchInstitute,basedondatafromcentralbanksandCEICData

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Thecoefficientofdeterminationrangesfromzerotooneandindicateshowmuchofthevariationinonevariable(thedependentvariable)canbeexplainedbyanother(the

explanatoryvariable).Thecloserthisvalueistozero,theweakertherelationshipbetweenthetwovariables.ThelowR²valuesfortheseeconomiesindicatethat

monetarybasegrowthandlendinggrowthwerelargelyunconnectedafterLehmanBrothersfailed—or,inJapan’scase(II),afterthebubbleburstin1990.

SouthKoreaandTaiwan,whichdidnotexperiencebalancesheetrecessionstriggeredbythecollapseofanassetbubble,havemuchhigherR²valuesthanJapanandthe

otheradvancedeconomies.Thisindicatesthatbanklendingexpandedinlinewithcentralbankliquidityprovision,justastheeconomicstextbookspredict.

Centralbankscanincreasethefundsavailableforcommercialbankstolendvia

monetaryeasing.Duringabalancesheetrecession,however,lendingitselffailsto

expand,leavingthatmoneytrappedwithinthebankingsystem.Monetary

accommodationthereforehasnomechanismthroughwhichtoworkinabalancesheetrecession—andinpractice,itdidnotwork.

SheerscaleofQEiscomplicatingnormalization

Fig.3:Japanesemonetaryindicators

2000

1800

1600

1400

1200

1000

800

600

400

200

0

5

4

3

2

1

0

-1

-2

-3

(1990Q1=100,seasonallyadjusted)

Quantitativeand

qualitativeeasing

Monetarybase

Moneysupply(M2)Banklending

GreatEastJapan

Earthquake

Quantitative

easing

90Q1

Bubbleburstsand

balancesheet

recessionstarts

Negative

interestrates

100

(%,y-y)

CoreCPI(ex.freshfood)

85868788212223242526

1469

278

164

Note:NomuraResearchInstitutemadeseasonaladjustmentstobanklendingfiguresandlinkedseriestomoneysupplystatisticsfor2003andearlier.

Source:NomuraResearchInstitute,basedondatafromBankofJapanandMinistryofInternalAffairsandCommunications

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Fig.4:ComparisonofexcessreservesinJapan,US,UKandeurozone

(1)LargestincreaseinexcessreservessinceAugust2008

(1)as%of

GDP

Scaleof

increasein(1)sinceAugust

2008

Presentvalueof

increaseinexcess

reservessince

August2008

Reduction

relativeto(1)

Increaseininterestexpensefrom1pptpolicyratehikeandshareoffiscaldeficit

US

USD3.96trn

16.5%

2110x

USD2.75trn

30.5%

USD27.5bn(1.5%)

Japan

JPY481.8trn

76.0%

1978x

JPY391.7trn

18.7%

JPY3.92trn(12.0%)

Eurozone

EUR4.14trn

29.1%

3971x

EUR2.18trn

47.4%

EUR21.8bn(4.7%)

UK

GBP948.2bn

20.0%

323x

GBP612.0bn

35.5%

GBP6.12bn(4.6%)

Note:Increaseineurozoneexcessreservesincludesincreaseinbalancesheldindepositfacility,whichcurrentlyaccountsforalmosttheentireamountshownhere.BOEandFedsuspendedreserverequirementsinMarch2009andMarch2020,respectively.EstimatesthereforeuseAugust2008levelofrequiredreservesforUKandFebruary2020levelforUS.

Source:NomuraResearchInstitute,basedondatafromFRB,CongressionalBudgetOffice,BOJ,MOF,ECB,Eurostat,andUKOfficeforNationalStatistics

Asaresult,Japan,theUS,theUKandtheeurozone—allofwhichimplementedQE—

continuedtoexperiencesluggisheconomicactivity,withinflationremainingbelowthe

2%policytarget.BOJGovernorKurodaneverthelesssupportedaconsumptiontaxhike,theexactoppositeofthefiscalstimulusessentialduringabalancesheetrecession,

whileturningupthedialonQEdespitetheabsenceofaneffectivetransmissionmechanism(Figure3).

Consequently,liquidityinjectedbytheBOJintheformofbanks’excessreservespeakedat¥482tninApril2024,anenormoussumequalto76%ofJapan’snominalGDP

(seasonallyadjustedandannualized)atthetime.

AsapercentageofGDP,QEinJapanwasseveraltimesthesizeoftheprograms

implementedintheUSandEurope(Figure4).ThisisakeyreasonwhymonetarypolicynormalizationhasbeenconsiderablymoredifficultfortheBOJthanforitsUSand

Europeancounterparts.

RaisingrateswithoutunwindingQEcreatesheavyfiscalburden

Atatimewhensomuchmoneyisheldasexcessreservesincommercialbanks’currentaccountsattheBOJ,eachpolicyratehikerequirestheBanktopayinterestonthese

depositsatthenew,higherrate.Otherwise,theseexcessreserveswouldbeusedtofundloans,cancelingtheinflation-suppressingeffectoftheratehike.

Thisposednoproblemsundernormalconditions,whenexcessreserveswerejustonetwo-thousandthoftheircurrentlevel.Butwithexcessreservesnowtotalingsome

¥400trn,a1pptincreaseinthepolicyrateraisesthecentralbank’sannualinterestexpenseby¥4trn.

That¥4trnwouldbecreditedasinteresttocommercialbanks’currentaccountsattheBOJ,increasingthefundsavailableforlendingandtherebycontributingtoinflation.

Furthermore,higherinterestexpensereducescentralbankremittancestotheMinistryofFinanceeachyearbyanequivalentamount,thusexpandingthefiscaldeficit.

Fourtrillionyenisequivalentto12%ofJapan’scurrentfiscaldeficit(Figure4)andisnotfarofffromthe¥5trnorsorequiredeachyeartofundtheconsumptiontaxcutonfoodand

beveragescurrentlyunderdiscussion.Inotherwords,a1ptriseinthepolicyratewouldbyitselfincreasethebudgetdeficitby12%.ThiscouldputadditionalupwardpressureonJGByieldsatatimewhenmarketsaroundtheworldarefocusedonfiscaldeficits.

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Viewedinthislight,atleastonereasonwhythegovernmentandtheBOJremain

cautiousaboutraisingratesappearstobethesubstantialfiscalburdenthatresultswhenthepolicyrateishikedwithoutunwindingQE.

CentralbanksinUS,UK,andeurozonebeganQTmuchearlierthanBOJ

Meanwhile,theFederalReservetooktheseissuesintoaccountfromtheoutset.In2017,then-FedChairJanetYellenembarkedonquantitativetightening(QT)—theunwindingofquantitativeeasing—eventhoughUSinflationhadnotyetreachedthe2%targetandtheeconomywasnotparticularlystrong(Figure5).

Fig.5:USmonetaryindicators

Monetarybase

Moneysupply(M2)

625

Loansandleasesinbankcredit

Bubbleburstand

balancesheet

recessionstarts

297

203

100

TaperingRatehikesbeginsbegin

+3.34%

750700650600550500450400350300250200150100 506.05.04.03.02.01.00.0

(Aug.2008=100,seasonallyadjusted)

PCEDeflator(core)

YellenlaunchesQT

(%,y-y)

0708091011121314151617181920212223242526

Note:Commercialbankloansandleases,adjustmentsfordiscontinuitiesmadebyNomuraResearchInstitute.Source:NomuraResearchInstitute,basedonFederalReserveBoard;USBureauofEconomicAnalysis

QTproceededsmoothlyatthetime,withprivate-sectorborrowingdemandstillweak.However,thepandemicsubsequentlyforcedtheFedtoresumeQE.

InresponsetotheinflationthatemergedafterCOVID,then-FedChairJeromePowellbeganraisingthepolicyratesharplyin2022.CurrentChairKevinWarshhasalso

expressedastrongdesiretoresumeQT.

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Fig.6:Eurozonemonetaryindicators

750

700

650

600

550

500

450

400

350

300

250

200

150

100

50

6.0

5.0

4.0

3.0

2.0

1.0

0.0

(Aug.2008=100,seasonallyadjusted)

BaseMoney

MoneySupply(M3)

CredittoEuroAreaResidents

Negative

interestrates441

Bubbleburstsand

balancesheet

recessionstarts

193

100129

(%,y-y)

CPIcore(ex.Energy,

food,alcoholic

beverages&tobacco)

+2.4%

0708091011121314151617181920212223242526

Note:Basemoney'sfiguresareseasonallyadjustedbyNomuraResearchInstitute.

Sources:NomuraResearchInstitute,basedonEuropeanCentralBank;Eurostat

Fig.7:UKmonetaryindicators

1400

1200

1000

800

600

400

200

0

8

6

4

2

0

(Aug.2008=100,seasonallyadjusted)

ReserveBalances+Notes&CoinsMoneySupply(M4)

BankLending(M4)

947

Bubbleburstsand

balancesheet

recessionstarts

202

118

(%,y-y)

CPIcore(ex.Energy,food,alcoholic

beverages&tobacco)

+2.6%

100

0708091011121314151617181920212223242526

Note:(1)Reservebalancesdataareseasonallyunadjusted.(2)Moneysupplyandbanklendingdataexcludeintermediatefinancialinstitutions.

Source:NomuraResearchInstitute,basedondatafromBankofEnglandandOfficeforNationalStatistics,UK

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TheEuropeanCentralBank(ECB)andtheBankofEngland(BOE),whichwere

compelledtoadoptsimilarpoliciesduringthepandemic,havesteadilyimplementedQTtoreducethemonetarybasestartingaround2023,whenthepandemicwaswinding

down(Figures6and7).

10yJGByieldlikelytocontinuerisingforsometimeevenwithfurtherBOJrate

hikes

TheBOJ,however,hasbeenextremelyslowtorespondtoinflationdrivenbythesameexternalfactors—thepandemicandthewarsinUkraineandIran.Theresultinginterestratedifferentialswithothereconomieshavesenttheyensharplyloweragainstother

currencies,thusstokingdomesticinflationandpushinglong-termbondyieldsevenhigher.

HadtheBankretaineditspre-Kurodareputationasaninflationfighter,aratehikemighthavebeenviewedasanentirelynaturalresponsetoamodestriseininflation.Market

inflationexpectationsmighthaveremainedlargelyunchanged,thuspotentiallypreventinganincreaseinthe10-yearJGByield.

However,theBOJ’seffortstoaddressdomesticinflationhavebeengreatlydelayed,

particularlywhencomparedwiththeresponsesofothercentralbanks.Attheveryleast,themarketnolongerviewstheBOJasaninflationfighter.Thatmeansthatmarket-setlong-termbondyieldsarelikelytocontinuerisingalongsidetheshort-termpolicyrate.

AsIhavediscussedinpreviousreports,exitingunconventionalmonetarypolicy

becomesaverycostlyundertakingonceinflationhasemerged.TheBOJisnowinthemidstofpreciselythatprocess.

USTreasurySecretaryScottBessenthassingledoutJapan’spoliciesbecauseJapannotonlyimplementedmonetaryeasingonanaltogetherdifferentscalethanother

nationsbutsubsequentlyfailedtorespondpromptlytoinflation.

Japan’stroublesomebeliefthat“deflationistherootofallevil”

TheBOJ’sresponsetoinflationhaslaggedsofarbehindthatofothercentralbanksnotonlybecauseofthehighcostofratehikesbutalsobecauseofanideologicalissue—thebeliefthat“deflationistherootofallevil.”

Asnotedearlier,thisargumentinitiallycamefromprominentoverseaseconomistslikeBenBernankeandPaulKrugman.However,theirpositionschangedsubstantiallywhenthe

housingbubblecollapsedin2008andtheUSeconomyenteredabalancesheetrecession.

Havingreadmybook,TheHolyGrailofMacroeconomics:LessonsfromJapan’sGreatRecession(JohnWiley&Sons,2008),FedChairBernankerecognizedthattheUSwasalsointhemidstofabalancesheetrecession.HethenbeganwarningthattheFed

wouldhavenomeansofrespondingiftheUSpursuedthefiscalconsolidationpoliciesadvocatedbytheRepublicanParty,whichwasthenoutofpower,andfelloffthe“fiscalcliff.”Thisamountedtoanexplicitacknowledgmentofthelimitsofmonetarypolicy

duringabalancesheetrecession.

Inthatsense,itisironicthatwhilethetwooriginalproponentsofmonetary

accommodationchangedtheirtunesafterrecognizingthepossibilityofabalancesheetrecession,policymakersinJapan—thebirthplaceofthetheory—madenoattemptto

understandit.Instead,theyremainedcommittedtomonetaryeasingbasedonan

unwaveringbeliefinthemonetaristapproach,leavingJapanwiththemajorexitproblemitfacestoday.

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Does“defure”refertodeflationoradeflationarygap?

FurthercomplicatingthisideologicalissueistheJapaneseterm“defure.”DerivedfromtheEnglishword“deflation,”itreferstoasustaineddeclineinprices.However,thetermdoesnotexplainwhypricesarefalling.Inotherwords,simplysayingthereisdeflationdoesnottelluswhetheritreflectsafailureofmonetarypolicyorinsufficientdemand.

Addingtotheconfusion,Englishhasanotherterm,“deflationarygap.”LikeitsJapanesetranslation,“defuregap,”thisdescribesasituationinwhichsupplyexceedsdemand,

leavinggoodsunsold,increasingunemployment,andweakeningtheeconomy.

Moreover,theexistenceofadeflationarygapdoesnotnecessarilyimplyfallingprices.

Insufficientdemandweakenstheeconomy,andpricesmayfallasaconsequence,butanysuchdeclineinpricesisaresultofinsufficientdemand,notacause.

Japancurrentlyhasadeflationarygap,notdeflation

When“defure”isusedinJapanese,however,itisoftenunclearwhetheritreferstodeflationoradeflationarygap.

If“defure”inthestatement“deflationistherootofallevil”meanstheformer,the

assertionisobviouslyuntrue.PricesinJapanhavenotseenasustaineddecline;indeed,theyhaverisencontinuouslyinrecentyears,yetGDPgrowthremainslackluster.

Butifitreferstoadeflationarygap,theassertionisclearlycorrect.BothhouseholdsandcompaniesinJapancontinuetorunfinancialsurpluses,whichwhencombinedamountto6.8%ofGDP(Figure1).Thissurpluscreatesademandshortfallregardlessofprice

developments.

Inotherwords,Japanisnotcurrentlyexperiencingdeflation,butitdoeshavea

deflationarygapsincetheprivatesectorcontinuestorunalargefinancialsurplus.

Debtaversionandglobalizationu