Deleveraging: Lessons from Japan

In the late 1980s, Japan’s credit-fuelled asset bubble burst, leading to a long stagnation. The growth problem experienced by many developed economies at the moment is reminiscent of the Japenese episode. If one compares current GDP, inflation, property prices and interest rates to the ones recorded in Japan, strikingly similar patterns emerge. Some refer to the current period of weak growth as "Japanization."

In a public lecture at the London School of Economics, Masaaki Shirakawa, Governor of the Bank of Japan, reflects on the Japenese experience, placing a special emphasis on the recovery in the background of deleveraging.

In a working paper released today by Bruegel, Eric Ruscher and Guntram B. Wolff look into corporate balance sheet adjustment episodes in Japan an Germany, among other countries. The authors find that adjustment episodes have a significant impact on corporate balance sheet ratios, with an accumulation of liquidity and a fall in leverage.