Stagnation, Japanese-style?

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Developed economies could face chronically weak demand and slow economic growth

  • Despite very expansionary monetary policies since the financial crisis, growth has been feeble.
  • Laurence Summers opined that developed countries are suffering from long-term stagnation.
  • A global excess of savings relative to investment opportunities may require negative interest rates, which current economic policy will not deliver.

In a recent speech*, Laurence H. Summers, the former US Treasury Secretary and a candidate this year for the Chair of the US Federal Reserve, suggested we take very seriously the idea that developed economies will not see a rapid return to pre-crisis growth rates – and that they may well be following the same roadmap that traces the decline of Japan’s economy since 1990.


Indeed, the recovery from the 2007-2008 financial crisis has been distinctly anaemic and in many countries it has been jobless as well. Despite loose monetary policy, unemployment is still not particularly low and inflationary pressures are conspicuous only by their absence. Real – inflation-adjusted – interest rates fell below zero per cent in some major economies.

Could the substantial decline in real rates be due to an imbalance between a glut of savings and a lack of investment opportunities?

Such an excess of savings would signify a long-standing structural weakness in the global economy. It could point to a constraint on demand. Moreover, as the glut of savings reflects weak investment, it suggests prospective supply growth will be slow.

The conclusion to this hypothesis is that until policymakers can rebalance an excess of savings relative to investment, developed economies face the spectre of chronically weak growth. Solutions could include (more) inflation to engineer sufficiently negative real interest rates. An alternative would be to use excess savings to finance large-scale public investment projects.

*A full account of Larry Summers’ presentation at the IMF Research Conference on 8 November in Washington DC is available at

Andrew C. Craig

Head of Financial Market Analysis & Publications

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