Recession, deflation, bank crisis and liquidity trap in Japan

During 1990s' the economy of Japan slipped into a long-sustained recession with strong deflation pressures. The aim of the paper is not to analyse this particular development in detail. It focuses on some specific aspects of macroeconomic development of the Japanese economy that gave birth to a new wave of interest in some nearly forgotten pieces of Keynesian macroeconomics, instead. One of them is liquidity trap that was highlighted by Paul Krugman's writings in the Japan's case. The paper thus presents some of his rather unconventional opinions and confronts them with the Japan's economic developments in the last few years. The structure of the paper evolves from the discussions of methodological aspects of deflation and liquidity trap in closed and open economies to the suggestions of various macroeconomic policies to cope with them. We conclude that Paul Krugman's view, though rather controversial, offers highly valuable ideas for Japanese policy-makers.

Keywords: savings, recession, Japan, deflation, Paul Krugman, liquidity trap, investments, real interest rate