With the return of Europe's economic doldrums and signs of a coming growth slowdown in the United States, advanced economies could be at risk of falling into the same kind of long-term rut that has captured Japan. To avoid that outcome, policymakers must recognize and address the deeper structural forces at work.

NEW YORK – Not too long ago, the conventional wisdom held that “Japanification” could never happen in Western economies. Leading US economists argued that if the combined threat of weak growth, disinflation, and perpetually low interest rates ever materialized, policymakers would have the tools to deal with it. They had no problem lecturing the Japanese about the need for bold measures to pull their country out of a decades-old rut. Japanification was regarded as the avoidable consequence of poor policymaking, not as an inevitability.

And yet the specter of Japanification now looms over the West. After the 2008 financial crisis, the recoveries in both Europe and the United States were more sluggish and less inclusive than the majority of policymakers, politicians, and economists expected. And, more recently, hopes for achieving “escape velocity” out of the “new normal” of low growth and persistent disinflationary pressure have been dashed in Europe and Japan, and some worry that they may be receding in the US.

Europe, in particular, is back in the grips of a worrisome regionwide slowdown. Growth projections have been consistently revised downward, and the European Central Bank has acknowledged that its earlier optimism about achieving on-target inflation was misplaced. With yields on government bonds having fallen, the global trade in securities at negative interest rates has reached around $10 trillion.

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