Web Trader MT5
Richard Koo’s term, and the most useful single concept for understanding Japan after 1990. A balance sheet recession happens when the private sector; households and corporations; collectively stops borrowing and starts paying down debt, even when interest rates are at zero. The problem isn’t the cost of money. It’s that everyone’s balance sheet is wrecked, and nobody wants more debt at any price.
Conventional monetary policy fails here. The central bank can cut rates to nothing, and credit demand still doesn’t respond. Koo’s argument was that fiscal policy has to fill the gap; government has to spend the savings the private sector won’t invest, or you get a deflationary spiral.
The framework explains a lot. Why QE in Japan didn’t produce inflation for two decades. Why the eurozone recovery after 2010 was so painfully slow. Why China’s post-2021 property correction is taking the shape it is.
Example: Japanese corporations spent the 1990s and 2000s repaying debt taken on during the bubble. Even as the Bank of Japan cut rates to zero and beyond, corporate borrowing stayed flat or shrank. Only sustained fiscal deficits prevented an outright depression; and the country was still in deflation 25 years later.
