For the moment, let me set aside the first condition and assume that central banks can distinguish an emerging bubble from improving fundamentals at an early stage. What about the other two conditions? Should we presume that a limited application of restrictive policy would materially restrain the speculative boom and make its eventual unwinding less disruptive for the overall economy?
Fear of a Japanese scenario is therefore misplaced. Moreover, the notion of Japan’s “lost decades” needs to be seen in perspective. The weakness of growth in Japan is partly a natural consequence of the country’s demographic change, as the working-age population has been shrinking since the mid-1990s.