Product Description

The revised edition of this highly acclaimed work presents crucial lessons from Japan’s recession that could aid the US and other economies as they struggle to recover from the current financial crisis.

This book is about Japan’s 15–year long recession and how it affected current theoretical thinking about its causes and cures. It has a detailed explanation on what happened to Japan, but the discoveries made are so far–reaching that a large portion of economics literature will have to be modified to accommodate another half to the macroeconomic spectrum of possibilities that conventional theorists have overlooked.

The author developed the idea of yin and yang business cycles where the conventional world of profit maximization is the yang and the world of balance sheet recession, where companies are minimizing debt, is the yin. Once so divided, many varied theories developed in macro economics since the 1930s can be nicely categorized into a single comprehensive theory– The Holy Grail of Macro Economics

Product Details

• Amazon Sales Rank: #22229 in Books
• Published on: 2009-07-14
• Original language: English
• Number of items: 1
• Binding: Paperback
• 352 pages

Review
Reviews from the previous edition

“…the Japanese policymakers who told everyone the US was in danger of falling into a prolonged period of economic weakness were right. To understand why this is true, you need to read a brilliant book by Richard Koo of the Nomura Research Institute.”

(Financial Times, January 2009)

“…the definitive book on Japan’s decade–long recession in the 1990s.”

(USA Today, March 2009)

“A must–read to an understanding of what Japan went through and what the United States and Europe may experience is Koo’s latest book The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.”

(The Edge Financial Daily, December 2008)

 “Books about the current global economic crisis are being written and published by the truckload. But few – perhaps none – are worth reading… Richard Koo, chief economist at the Nomura Research Institute in Tokyo, a think tank attached to Japan’s biggest investment bank, watched Japan’s ‘lost decade’ from an excellent vantage point: he was close enough to understand the detail, data and ways in which both corporate and political decisions were made, and independent enough to be able to analyse what happened in a reasonably detached and cool way.”

(Survival, May 2009)

Review
"...provide fascinating insights into the problems of Japan...interesting thesis" (Wilmott.com/blogs, August 3rd 2009)

Customer Reviews

Deserves a Nobel Prize
Koo's thesis is stunning, yet simple. I was appalled at my own ignorance - having assumed like many others that Japanese government spending and fiscal packages had done little good over the last 15 years or more. Wrong! Highly relevant in 2008 not only to Gordon Brown's plan to spend Britain out of recession but also to the fiscal straitjacket of the Maastricht Treaty. The text is as enjoyable as a J.K. Galbraith classic, yet backed up with key statistics & charts to match. This book should be mandatory reading for all Chancellors & finance ministers.

Brilliant critique of consensus policy
Richard Koo, chief economist of Tokyo's Nomura Research Institute, has written a fascinating and important book. He claims that capitalist economies have two phases: the ordinary phase, in which firms aim to maximise profits, and the post-bubble phase, when they aim to pay off their debts. He believes that he has found the missing link of economics: "corporate debt minimisation, therefore, is the long-overlooked micro-foundation of Keynesian macro-economics."

It's still boom and bust. Koo claims that in the boom phase, monetary policy works, but not fiscal; in the bust phase, only fiscal policy works, not monetary. He shows how monetary policy cannot fight a slump. He contends that only huge fiscal stimuli, government actions to boost domestic demand, can prevent slumps.

Koo claims that, in the 1930s depression, in Japan's recession since 1990, and in the present crisis, the problem was the private sector's lack of demand for loans, not a lack of funds from the central banks. Contrary to the consensus, these depressions were not caused by the wrong monetary policy.

How to fight a slump? Cutting spending to reduce government debt is the road to disaster. In the 1930s, both President Hoover and Chancellor Bruning insisted on balancing the budget, which crashed the US and German economies. In 1945 the British government's debt was 250% of GDP, but the country survived. Between 1933 and 1936, President Roosevelt raised government spending by 125%, so GDP rose by 48% and tax revenues rose by 100%. But in 1937 he changed tack and cut spending: industrial output fell by 33%.

Japan's recession (caused by falls in the value of its assets - land and loans) destroyed 1500 trillion yens' worth of wealth - three years of Japan's GDP. (The USA's depression lost it one year's GDP.) In Japan, monetary stimuli failed, so the Japanese government proposed irrelevant Thatcherite supply-side changes, like privatising the post office.

In 1997 the Hashimoto government, under IMF pressure, cut spending and raised taxes to balance the budget. As a result, output fell for five quarters, Japan's worst post-war meltdown, and the budget deficit rose from 22 trillion yen in 1996 to 38 trillion in 1999. In 2001, the Koizumi government did the same - with the same result. It also tried the monetary policy of quantitative easing. But this did not increase lending or the money supply. It was irrelevant.

Subsequently, the Japanese government adopted a policy of no fiscal consolidation without growth, i.e. no spending cuts or tax rises before private-sector demand recovered. This fiscal stimulus prevented a 1930s-style depression; by 2005, firms had started to borrow again.

Again, in Germany's balance sheet recession of 2000-05, "the Maastricht Treaty prevented it from applying the fiscal stimulus it needed. This deepened the recession", as Koo observes.

Finally, he notes the harmful effects of the free movement of capital: "in view of the explosion of cross-border capital flows during the past two decades contributing to adverse currency movements and the widening of global imbalances, some restrictions on those flows may be desirable." He also notes the damage done by free trade: "that market forces have not only failed to rectify trade imbalances but actually made them worse suggests that some kind of government action may be necessary."

Complex issues, layman terms
An excellent read.
I'm not an economist but the logic presented throughout this is thorough, compelling and at all times reinforced by statistical evidence.
The macroeconomic theory explained throughout is that economies operate in two phases of a cycle - the 'yang' phase, when firms concentrate on profit maximisation; and the 'yin' phase, much rarer, when the aim is debt repayment. This theory on its own makes sense, as it relates to how individuals and households themselves behave when faced with a drop in their asset values.

In any discipline there tends to be a rush to voodoo magic to explain anomalies that the author may not be capable of explaining himself. Instead of wandering off into a fog, Koo stays clearly connected to the layman reader, using simple terms, analogies and hard eveidence to reinforce his point. So there is nothing like 'price stickiness' in this book. Instead we get convincing evidence from the two major downturns of the last century - the US Great Depression and the Japanese Great Recession.

The overwhelming conclusion is that Governments faced with a balance sheet recession must use fiscal policy to correct it and maintain this until the economy has shifted back into a 'yang' phase. All thoughts of correcting a budget deficit must be postponed until the private sector can once again become the engine for the economy. Writing from Ireland, where we have had a more severe property correction than most and are facing into a budget of fiscal correction in December, it makes me think that negotiating funds for fiscal expenditure may instead be the most important issue for our Government now.