The prolonged recession in Japan (starting from the 1990s) could have been avoided if more emphasis was placed on credit creation (bank lending).
Instead, Japan focused on dramatically increasing fiscal spending at the onset of the recession, by issuing government debt to the non-bank private sector. This led to crowding out as the money injected via fiscal spending was absorbed via bond issuance.
Bank of Japan should have purchased non-performing assets from the banks at face value, in turn improving liquidity and strengthening banks’ balance sheets. Second, instead of financing spending through government bonds, the government should have done this through private loans (non-tradable) with banks.
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