Is Japanese stagnation demand-side or supply-side?

Here is an excellent post by Noah Smith on that topic.

Here is one bit:

It seems to me that the standard New Keynesian sticky-price story just cannot explain Japan. The “short run” for Japan is over and done. We are not looking at a “short-run” fluctuation caused by sticky prices.

This has implications for policy. It means that we can’t expect the “first arrow” of Abenomics – quantitative easing – to boost the real economy through the kind of channel described by a New Keynesian or AD-AS model. It might do so through some other channel, but how exactly that will work is not clear.

Here is another bit:

But I don’t think Japan is living in an RBC world either. Because in an RBC world, keeping interest rates at zero for decades, and printing a bunch of money (as the Bank of Japan did in the mid-2000s), should cause inflation (without helping growth). Instead, we see persistent deflation. So an RBC model of the common type can’t be describing Japan’s world either.

Here is his conclusion, with which I very much agree:

I’m not sure I know any model that describes Japan; maybe we don’t have one. But my guess is that it’s a world in which “Aggregate Demand” and “Aggregate Supply” are not as distinct entities as they are in Econ 102. In an AD-AS framework, either the AD curve or one of the AS curves shifts on its own. But in Japan, it may be that what look like supply shocks (falling productivity) and what look like demand shocks (deflation) may actually be due to the same cause.

And whatever world Japan is living in may have multiple equilibria. It may be that Japan is trapped in a “bad equilibrium”, and it will require a “big push” to kick it back to the “good equilibrium”. In fact, that seems to me to be the implicit premise of Abenomics.

In any case, we shouldn’t be thinking about Japan solely in terms of our standard textbook models. The real world appears to be much weirder than those toy environments.