When the global financial crisis struck in 2008, the US and Europe had a ready model for how not to respond: Japan.
Policymakers such as then Federal Reserve chairman Ben Bernanke had spent years thinking about Japan’s descent into deflation after its financial bubble burst in 1990. Japan, they decided, had cut interest rates halfheartedly and was slow to clean up its banks. With aggressive stimulus and bank recapitalisation, they would get different results.
For a few years, it seemed to work, but now a decade on from the crisis, inflation is below target on both sides of the Atlantic, the European Central Bank is mired deep in negative interest rates, and the Fed is cutting rates from a peak of just 2.25-2.5 per cent. It is a process many investors dub “Japanification”.