The three stages of "Japanisation", in Japan and now in the euro zone

We use the term "Japanisation" for the process that brings interest rates down to zero across all maturities and leads to a very high public debt ratio and a large central bank balance sheet. Japanisation takes place in three stages; these stages have been seen since the late 1990s in Japan and since the start of this decade in the euro zone. The skewing of income distribution at the expense of employees leads to low inflation and weak household demand, which prompts the central bank to choose a zero short-term interest rate. Since the short-term interest rate is zero, the economic policy response is an expansionary fiscal policy each time activity weakens, leading to a sharp rise in the public debt ratio in the medium term, Since the public debt ratio becomes high, the long-term interest rate must also become zero to ensure fiscal solvency; the central bank must therefore keep interest rates at zero at all maturities, which means that it has to buy government bonds and increase the size of its balance sheet.