During Japan's bubble-economy years of fiscal 1987-1990, consumer spending grew at an annualized 5.5 percent in real terms. But during the Heisei recession of fiscal 1991-2001, consumer-spending growth slowed to an annualized 1.0 percent. Most experts agree that the slowdown in consumer spending, which accounts for 60 percent of gross domestic expenditures, was mainly responsible for the recession.
So, what should be done to stimulate consumer spending? World-renowned economist Paul Krugman argues that the public should be encouraged to expect inflation. His theory is based on psychology: Consumers tend to increase spending if they expect inflation, and cut spending if they anticipate deflation.
In my opinion, though, this psychology applies only to real estate. During the bubble economy, land prices in and around Japan's six largest cities soared at an annualized 23.2 percent. In five years starting in fiscal 1985, land prices in the same area grew 2.8 times. In such a situation, people naturally rushed to obtain mortgages and buy homes.