The long stagnation of the Japanese economy during the 1990s (and now it appears even during the 2000s!) is a historical event. Explanation of this long stagnation of once such a vigorous economy is surely a great challenge to macroeconomists. In fact, a number of possible causes of the long stagnation of the Japanese economy have been offered: falls of asset price, hangover of bad loans, liquidity trap, policy mistakes, both fiscal and monetary “hollowing out” due to rising China, and so on. Most likely causes are multiple rather than single. Granted, in this chapter, we focus on a particular factor, namely uncertainty. Specifically using a theoretical model, we show that mounting uncertainty possibly traps the economy into a long stagnation. We also discuss its implication for the efficacy of monetary policy
Kuttner and Posen (2001:96), in their analysis of what they call the Great Recession of Japan, draw the following conclusion.