Book Review: Japan's lessons focus of book on recessions

Vital lessons from Japan's 15-year recession can be found inside the pages of The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession.

This revised edition covers a period in Japan during which many conventional policy responses were rendered ineffective due to the peculiar nature of what author Richard Koo, chief economist at Nomura Research Institute, calls a "balance sheet recession".

Koo said that Japan's "Great Recession" showed that when faced with a massive fall in asset prices, companies typically jettison the conventional goal of profit maximization and move to minimize debt in order to restore their credit ratings.

This shift in corporate priorities, however, has huge theoretical and practical implications and opens up a whole new field of study.

For example, the new insight can describe the precise mechanism of prolonged depression and the liquidity trap that conventional economics - based on corporate profit maximization - has so far failed to offer as a convincing explanation.

The author developed the idea of yin and yang business cycles, in which the conventional world of profit maximization is the yang and the world of balance sheet recession -- where companies are minimizing debt -- is the yin.

Once divided this way, varied theories that were developed since the 1930s can be nicely categorized into a single comprehensive theory, i.e. a holy grail of macroeconomics.

The policy implication of this discovery is immense, in that the conventional aversion to fiscal policy in favor of monetary policy will have to be completely reversed when the economy is in the yin phase.

This new edition of Richard Koo's acclaimed work comes at a timely moment as the world searches for solutions to the post-bubble economic crisis.

As one of Asia's leading economists and an advisor to national governments, Koo proposes a remedy to the current economic meltdown by spelling out policies needed to pull the economy out of this recession.

Although the book talks a lot about macroeconomic theories, it is written in a way that ordinary businessmen or anyone interested in Japan's economy can read and understand with ease.

(China Daily 10/19/2009 page5)