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Will Japan also lead the way on phony recessions?

Summary:
In recent decades, Japan has been a pathbreaker for the rest of the world. It led the way on slowing population growth (and then falling population), secular stagnation, and zero interest rates. Will Japan’s frequent “phony recessions” also begin to occur in the US? I suspect the answer is yes. As you can see from this graph, the US hasn’t had any phony recessions. Each time there is an official recession, unemployment rises by at least 2%: In contrast, Japan has lots of phony recessions. After a big actual recession in 2008-09, Japan has had three phony recessions (maybe 4, if they are in one now), defined as brief periods of falling RGDP and a booming labor market: I’m not certain that the US will begin having phony recessions. But given that we’ve adopted

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In recent decades, Japan has been a pathbreaker for the rest of the world. It led the way on slowing population growth (and then falling population), secular stagnation, and zero interest rates. Will Japan’s frequent “phony recessions” also begin to occur in the US? I suspect the answer is yes.

As you can see from this graph, the US hasn’t had any phony recessions. Each time there is an official recession, unemployment rises by at least 2%:

Will Japan also lead the way on phony recessions?

In contrast, Japan has lots of phony recessions. After a big actual recession in 2008-09, Japan has had three phony recessions (maybe 4, if they are in one now), defined as brief periods of falling RGDP and a booming labor market:

Will Japan also lead the way on phony recessions?

I’m not certain that the US will begin having phony recessions. But given that we’ve adopted so many other recent Japanese trends, I think it’s fairly likely that it will happen in the US before too long.

It’s certainly something to keep an eye out for.

PS. If the Fed wants a V-shaped recovery from Covid-19, consider level targeting. That’s what it’s for.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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