Artificial Intelligence, Labor Market Structure, or Hysteresis of Past Recessions? Why Prices in Japan Do Not Rise Despite Quantitative Easing

  • Koichi HamadaEmail author
  • Makoto Sakurai
  • Masahiko Kataoka
Conference paper


Despite the recent strong economic recovery, growth in wages and prices has been sluggish across the globe. Japan has come to face this issue ahead of any others. The policy authorities of each economy could learn something from the case study of Japan. This paper will examine some factors that have restrained growth in wages and prices in Japan, and discuss the desired policy responses to address this issue.

In relation to the theme of this session—inequality, wages, and growth—factors responsible for this curb on growth in wages and prices can be divided primarily into two categories. One is “hysteresis” brought about by past serious economic downturns. Serious economic downturns have left persistent damage to the supply side of the economy through various channels, including an increase in the number of “discouraged workers” and “involuntary non-regular employees,” a slowdown in (human) capital accumulation, and the inefficient business processes that took root under excessive competition. This damage has created the slack that is easing the upward pressure on prices that has come from an expansion in demand. Besides this hysteresis, the second category includes factors of a more structural nature that reduce upward pressure on wages amid an increase in labor demand. These factors include: an increase in labor participation of women and the elderly, whose wages are relatively low; firms’ and households’ anxiety for the future; and technological innovation in the IT industry, such as robotic process automation (RPA) and artificial intelligence (AI).

If the supply-demand conditions continue to tighten, the factors in the former category will eventually mitigate with hysteresis reversing. Moreover, the reversal of hysteresis is a desirable change, in that it can enrich people’s lives. To bring this about, the Bank is expected to continue to maintain the adequate level of tightening of supply-demand conditions, thereby supporting the reversal of hysteresis. Given that it could take some time to reverse hysteresis, the Bank needs to conduct monetary policy while closely monitoring the economic and financial conditions so that no severe distortion will be created under the prolonged accommodative financial condition. Meanwhile, factors in the latter category need to be addressed in a more structural way. Monetary policy and structural policy must nonetheless address the issue interactively, since these factors are somewhat related to each other.

This article consists of two sections. Section 1, written by Makoto Sakurai, a Member of the Policy Board of the Bank of Japan, and Masahiko Kataoka, Director, Secretariat of the Policy Board, discusses the conduct of monetary policy amid the hysteresis. Section 2, by Koichi Hamada, Tuntex Emeritus Professor of Economics at Yale University, discusses the desired fiscal and structural policy response by focusing on the education system in Japan and its relation to technological innovation, especially advances in the IT field.


  1. Acemoglu, D. (2018). Artificial intelligence, automation and work (MIT Department of economics working paper no. 18–01).Google Scholar
  2. Ball, L. M. (2014). Long-term damage from the great recession in OECD countries (NBER Working Paper no. 20185).Google Scholar
  3. Ball, L. M. (2015, March 30). Monetary policy for a high-pressure economy. Center on Budget and Policy Priorities.Google Scholar
  4. Blanchflower, D. G., & Levin, A. T. (2015). Labor market slack and monetary policy (NBER Working Paper no. 21094).Google Scholar
  5. Cerra, V., & Saxena, S. C. (2008). Growth dynamics: The myth of economic recovery. American Economic Review, 98(1), 439–457.CrossRefGoogle Scholar
  6. Cœuré, B. (2017, May 19). Scars or scratches? Hysteresis in the euro area. A speech delivered at the International Center for Monetary and Banking Studies, Geneva.Google Scholar
  7. Dekle, R., & Hamada, K. (2015). Japanese monetary policy and international Spillovers. Journal of International Money and Finance, 52, 175–199.Google Scholar
  8. Genda, Y., Kondo, A., & Ohta, S. (2010). Long-term effects of a recession at labor market entry in Japan and the United States. The Journal of Human Resources, Winter 45(1), 157–196.CrossRefGoogle Scholar
  9. Hall, R. E. (2014). Quantifying the lasting harm to the U.S. economy from the financial crisis (NBER Working Paper no. 20183).Google Scholar
  10. Haltmaier, J. (2012). Do recessions affect potential output? (Board of Governors of the Federal Reserve System International Finance Discussion Papers no. 1066).CrossRefGoogle Scholar
  11. Hamada, K. (1969). Optimal Capital Accumulation by an Economy Facing an International Capital Market. Journal of Political Economy, 77(4), 684–697.CrossRefGoogle Scholar
  12. Hamada, K., & Sakurai, M. (1978). International transmission of stagflation under fixed and flexible exchange rates. Journal of Political Economy, 86(5), 877–895.CrossRefGoogle Scholar
  13. Heckman, J. J. (2008). Schools, skills, and synapses (NBER working paper no. 14064).Google Scholar
  14. Heckman, J. J. (2013). Giving kids a fair chance.Google Scholar
  15. Heckman, J. J, & Kautz, T. D. (2012). Hard evidence on soft skills (NBER Working Paper no. 18121).Google Scholar
  16. Heckman, J. J, Moon, S. H., Pinto, R., Savelyev, P. A., & Yavitz, A. (2010). The rate of return to the High/Scope Perry Preschool Program (NBER working paper no. 15471).Google Scholar
  17. Holzer, H. J., Raphael, S., & Stoll, M. A. (2003). Employers in the boom: How did the hiring of unskilled workers change during the 1990s? (IRP Discussion Paper no.1267–03).Google Scholar
  18. Hotchkiss, J. L., & Moore, R. E. (2018). Some like it hot: Assessing longer-term labor market benefits from a high-pressure economy (Atlanta Fed working paper no. 2018-1a).Google Scholar
  19. Howard, G., Martin, R., & Wilson, B. A. (2011). Are recoveries from banking and financial crises really so different? (Board of Governors of the Federal Reserve System International Finance Discussion Papers no. 1037).Google Scholar
  20. Jorgenson, D. W., Nomura, K., & Samuels, J. D. (2016). A half century of trans-Pacific competition: Price level indices and productivity gaps for Japanese and US industries, 1955–2012. In Jorgenson et al. (Eds.), The world economy: Growth or stagnation? (pp. 469–507). Cambridge University Press.Google Scholar
  21. Kroft, K., Lange, F., & Notowidigdo, M. J. (2012). Duration dependence and labor market conditions: Theory and evidence from a field experiment (NBER Working Paper no. 18387).Google Scholar
  22. Martin, R., Munyan, T, & Wilson, B. A. (2015). Potential output and recessions: Are we fooling ourselves? (Board of Governors of the Federal Reserve System International Finance Discussion Papers no. 1145).Google Scholar
  23. Kocherlakota, N. (2014). Discussion of paper: ‘Quantifying the lasting harm to the U.S. economy from the financial crisis,’ A paper presented at the National Bureau of economic research macroeconomics conference.Google Scholar
  24. Reifschneider, D., Wascher, W., & Wilcox, D. (2013). Aggregate supply in the United States: Recent developments and implications for the conduct of monetary policy (Board of Governors of the Federal Reserve System Finance and Economics Discussion Series no. 2013-77).Google Scholar
  25. Research and Statistics Department, Bank of Japan. (2018). A summary of the conference co-hosted by the Center for Advanced Research in finance (CARF), the University of Tokyo, and the research and statistics department, bank of Japan, Entitled. In New developments in macroeconomic analysis: Linkage between business cycle and growth trend. Released on March 30 (available only in Japanese).Google Scholar
  26. Sims, C. A. (1994). A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic Theory, 4(3), 381–399.CrossRefGoogle Scholar
  27. Sims, C. A. (2016). Luncheon address: Fiscal policy, monetary policy and Central Bank Independence. A speech delivered at the designing resilient monetary policy frameworks for the future, Jackson Hole, Wyoming, August 25.Google Scholar
  28. The Economist. (2018, May 12th–18th). The $100 million bet. The Economist, pp. 11, 19–22.Google Scholar
  29. Watanabe, T., & Iwamura, M. (2004). New price theory: Fiscal theory of price level and the role of monetary policy. Iwanami Shoten Publishers.Google Scholar
  30. Willem, H. B. (2017). Bad and good ‘Fiscal theories of the price level’ (CEPR discussion paper no. DP11975).Google Scholar
  31. Yellen, J. L. (2014, March 14). What the federal reserve is doing to promote a stronger job market. A speech delivered at the National Interagency Community Reinvestment Conference, Chicago, Illinois.Google Scholar
  32. Yellen, J. L. (2016, October 14). Macroeconomics research after the crisis. A speech delivered at 60th annual economic conference sponsored by the Federal Reserve Bank of Boston, Boston, MA.Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Koichi Hamada
    • 1
    Email author
  • Makoto Sakurai
    • 2
  • Masahiko Kataoka
    • 3
  1. 1.Tuntex Professor Emeritus of EconomicsYale UniversityNew HavenUSA
  2. 2.Member of the Policy BoardBank of JapanTokyoJapan
  3. 3.DirectorBank of JapanTokyoJapan

Personalised recommendations