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The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession [Paperback]

Richard C. Koo
4.7 out of 5 stars  See all reviews (13 customer reviews)
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Book Description

14 July 2009
The revised edition of this highly acclaimed work presents crucial lessons from Japan′s recession that could aid the US and other economies as they struggle to recover from the current financial crisis. This book is about Japan′s 15–year long recession and how it affected current theoretical thinking about its causes and cures. It has a detailed explanation on what happened to Japan, but the discoveries made are so far–reaching that a large portion of economics literature will have to be modified to accommodate another half to the macroeconomic spectrum of possibilities that conventional theorists have overlooked. The author developed the idea of yin and yang business cycles where 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 so divided, many varied theories developed in macro economics since the 1930s can be nicely categorized into a single comprehensive theory– The Holy Grail of Macro Economics

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Product details

  • Paperback: 356 pages
  • Publisher: John Wiley & Sons; Revised Edition edition (14 July 2009)
  • Language: English
  • ISBN-10: 0470824948
  • ISBN-13: 978-0470824948
  • Product Dimensions: 15.3 x 2.7 x 23.1 cm
  • Average Customer Review: 4.7 out of 5 stars  See all reviews (13 customer reviews)
  • Amazon Bestsellers Rank: 142,209 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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Reviews from the previous edition "...provide fascinating insights into the problems of Japan...interesting thesis" ( , August 2009) "…the Japanese policymakers who told everyone the US was in danger of falling into a prolonged period of economic weakness were right. To understand why this is true, you need to read a brilliant book by Richard Koo of the Nomura Research Institute." ( Financial Times , January 2009) "…the definitive book on Japan′s decade–long recession in the 1990s." ( USA Today , March 2009) "Books about the current global economic crisis are being written and published by the truckload. But few – perhaps none – are worth reading… Richard Koo, chief economist at the Nomura Research Institute in Tokyo, a think tank attached to Japan′s biggest investment bank, watched Japan′s ′lost decade′ from an excellent vantage point: he was close enough to understand the detail, data and ways in which both corporate and political decisions were made, and independent enough to be able to analyse what happened in a reasonably detached and cool way." ( Survival , May 2009) "A must–read to an understanding of what Japan went through and what the United States and Europe may experience is Koo′s latest book The Holy Grail of Macroeconomics: Lessons from Japan′s Great Recession ." ( The Edge Financial Daily , December 2008)

"...provide fascinating insights into the problems of Japan...interesting thesis" (, August 3rd 2009)

From the Inside Flap

How did the great Depression of the 1930s get to be so bad for so long? That question has baffled economists for decades. Ben S. Bernanke, the current Fed Chairman, even called understanding the great Depression the as yet–unattained "holy Grail of Macroeconomics." Japan′s Great recession of 1990–2005 finally gave us some vital clues as to how a post–bubble economy can plunge into prolonged recession while leaving conventional policy responses largely ineffective. Building on the author′s earlier work Balance Sheet Recession: Japan′s Struggle with Uncharted Economics and its Global Implications (John Wiley, Singapore, 2003), The Holy Grail of Macroenomics: Lessons from Japan′s Great Recession argues that there are actually two phases to an economy, the ordinary (or yang) phase, in which the private sector is maximizing profits, and the post–bubble (or yin) phase, in which private sector is minimizing debt, or repairing damaged balance sheets. Although conventional economics is useful in analyzing economies in the yang phase, it is less useful in explaining phenomena such as the "liquidity trap" that is typical of an economy in the yin phase. The distinction between the yin and yang phases also explains why some policies work well in some situations but not in others. Indeed, it offers the crucial foundation to macroeconomics that has been missing since the days of Keynes. This groundbreaking book not only explains what happened to the U.S. during the Great Depression and to Japan during the Great recession, it also offers important policy recommendations for fighting post–bubble economic downturns in any country, including the current subprime crisis in the U.S. --This text refers to the Hardcover edition.

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Customer Reviews

4.7 out of 5 stars
4.7 out of 5 stars
Most Helpful Customer Reviews
15 of 16 people found the following review helpful
5.0 out of 5 stars Brilliant critique of consensus policy 14 Sep 2009
Richard Koo, chief economist of Tokyo's Nomura Research Institute, has written a fascinating and important book. He claims that capitalist economies have two phases: the ordinary phase, in which firms aim to maximise profits, and the post-bubble phase, when they aim to pay off their debts. He believes that he has found the missing link of economics: "corporate debt minimisation, therefore, is the long-overlooked micro-foundation of Keynesian macro-economics."

It's still boom and bust. Koo claims that in the boom phase, monetary policy works, but not fiscal; in the bust phase, only fiscal policy works, not monetary. He shows how monetary policy cannot fight a slump. He contends that only huge fiscal stimuli, government actions to boost domestic demand, can prevent slumps.

Koo claims that, in the 1930s depression, in Japan's recession since 1990, and in the present crisis, the problem was the private sector's lack of demand for loans, not a lack of funds from the central banks. Contrary to the consensus, these depressions were not caused by the wrong monetary policy.

How to fight a slump? Cutting spending to reduce government debt is the road to disaster. In the 1930s, both President Hoover and Chancellor Bruning insisted on balancing the budget, which crashed the US and German economies. In 1945 the British government's debt was 250% of GDP, but the country survived. Between 1933 and 1936, President Roosevelt raised government spending by 125%, so GDP rose by 48% and tax revenues rose by 100%. But in 1937 he changed tack and cut spending: industrial output fell by 33%.

Japan's recession (caused by falls in the value of its assets - land and loans) destroyed 1500 trillion yens' worth of wealth - three years of Japan's GDP.
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3 of 3 people found the following review helpful
5.0 out of 5 stars Excellent but flawed 24 Jan 2010
Format:Paperback|Verified Purchase
I very much enjoyed this book and as everyday passes it seems to grow with relevance. It is very interesting and informative and offers some insightful contrarian views on the nature of modern recessions/depressions.

While I have rated it 5 stars it does have some flaws. As one of the other reviewers have commented the data and the quality of the charts are rather lacking. It would have been nice to have more detail and some of the underlying data.

While the author might be right; his approach lacks some academic rigour. The book doesn't sufficiently test alternative hypothesises and eliminate them as possible explanations. Rather the author immediately moves onto his theory as the only possible explanation.

Stylistically, it could have been shorter, a little less repetitive and more concise. Though these are minor complaints.
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26 of 29 people found the following review helpful
5.0 out of 5 stars Deserves a Nobel Prize 16 Nov 2008
By M. Bull
Koo's thesis is stunning, yet simple. I was appalled at my own ignorance - having assumed like many others that Japanese government spending and fiscal packages had done little good over the last 15 years or more. Wrong! Highly relevant in 2008 not only to Gordon Brown's plan to spend Britain out of recession but also to the fiscal straitjacket of the Maastricht Treaty. The text is as enjoyable as a J.K. Galbraith classic, yet backed up with key statistics & charts to match. This book should be mandatory reading for all Chancellors & finance ministers.
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3 of 3 people found the following review helpful
Format:Paperback|Verified Purchase
This book is an excellent exercise in well structured logical argument and the clear concise communication of a complex subject. If I was creating a Dream-Team type university experience, I would want Richard Koo as one of my main lecturers or professors.

At the heart of this book is the concept that some recessions are different. He argues that a recession that comes after the bursting of a large financial bubble in that country, will not respond to the usual monetary policies relevant to normal recessions. In a normal recession lowering interest rates will re-stimulate companies to invest and free up cash from their loan repayments, but in a "balance sheet recession" many companies will have been stung by the asset bubble bursting, and will be prioritising paying down their loans and liabilities, regardless of how low interest rates go. Taken as a whole, the companies of the troubled countries prioritise improving their (often hidden) damaged balance sheets, and therefore stray from the profit maximising and maximum return on capital theories which underpin monetarist economic theory. Where as monetarist theory expects lower interest rates to kick start a recovery, in this balance sheet recession companies continue to contribute negative investment flows, sucking activity out of the macro economy year on year.

Koo therefore explains that the states role in this abnormal situation is to create state investment (spend and borrow) to counter-act the negative investment (extra saving and paying down of liabilities) of the country's companies, in order to maintain a more constant level of activity in the economy.
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4 of 5 people found the following review helpful
5.0 out of 5 stars Complex issues, layman terms 2 Oct 2009
Format:Paperback|Verified Purchase
An excellent read.
I'm not an economist but the logic presented throughout this is thorough, compelling and at all times reinforced by statistical evidence.
The macroeconomic theory explained throughout is that economies operate in two phases of a cycle - the 'yang' phase, when firms concentrate on profit maximisation; and the 'yin' phase, much rarer, when the aim is debt repayment. This theory on its own makes sense, as it relates to how individuals and households themselves behave when faced with a drop in their asset values.

In any discipline there tends to be a rush to voodoo magic to explain anomalies that the author may not be capable of explaining himself. Instead of wandering off into a fog, Koo stays clearly connected to the layman reader, using simple terms, analogies and hard eveidence to reinforce his point. So there is nothing like 'price stickiness' in this book. Instead we get convincing evidence from the two major downturns of the last century - the US Great Depression and the Japanese Great Recession.

The overwhelming conclusion is that Governments faced with a balance sheet recession must use fiscal policy to correct it and maintain this until the economy has shifted back into a 'yang' phase. All thoughts of correcting a budget deficit must be postponed until the private sector can once again become the engine for the economy. Writing from Ireland, where we have had a more severe property correction than most and are facing into a budget of fiscal correction in December, it makes me think that negotiating funds for fiscal expenditure may instead be the most important issue for our Government now.
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Most Recent Customer Reviews
5.0 out of 5 stars Finally Somebody Tells It Like It Is!
Amazing book, although somewhat repetitive.

Koo has a proven track record and debunks the most prevalent myths about what went wrong, and is still going wrong to this... Read more
Published 8 months ago by Rasmus With
4.0 out of 5 stars Overtly repettive
This book is very repetitive, he probably repeats his point over 50 times and makes a very good case for it too. Read more
Published 9 months ago by DIOMIDES MAVROYIANNIS
5.0 out of 5 stars Great book, I hope Abe has read it!
This book makes a clear case with plenty of evidence for the core reasons behind the Japanese stagnation of the last 20 year or so. Read more
Published 18 months ago by mahoneko
5.0 out of 5 stars What a puzzle is world economics!
An important part of my personal learning curve. It is unravelling all the gobbledigook for me. We can only change our world one by one, bit by bit.
Published 19 months ago by marilyn matthieson
5.0 out of 5 stars Introducing "balance sheet recessions"
Richard Koo introduces what he calls a "balance sheet recession": where the private sector decides to pay down existing debt instead of making new borrowings even when interest... Read more
Published on 4 Jan 2012 by DigiTAL
5.0 out of 5 stars For the sake of balance...
There is a one star review below from someone who admits he has not even read the book. I am buying this book and will update this review later. Read more
Published on 13 Dec 2011 by Mr. Patrick D. Creamer
5.0 out of 5 stars A tour de force
An inspiring read! Nomura's chief economist, Richard Koo enriches our understanding of how to deal with recessions. Read more
Published on 31 Oct 2010 by Nicholas Clark
2.0 out of 5 stars Selective data
Koo's argues using selective data that Japan's lost decade was not really lost and that it would have been a depression without massive government spending. Read more
Published on 18 Jun 2009 by Pyor
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