Question

Koo argues that the Japanese economy in the 1990s suffered from a balance sheet recession. What does this mean? What is the evidence for this?

Answer 1

Balance sheet recession can be defined as in 1990 Japanese economy collapsed due to stock and land price and become insolvent due to reason value of assets were less than the liabilities. Even at that time zero interest rate on debts was prevailing in spite of firm did not borrow from the market but they paid their debt from their retained earnings. Due to reason gdp fall to 22% in that year which was high in in 2003 also but to protect the economy government raised their spending and borrowing activities and some how managed to sustain their economy to collapse but against it monetary policy could not work well because it was consider tightened at time of recession