Heiner Flassbeck discusses Krugman’s take on Japan at his site Flassbeck-Economics. In particular, he criticizes the view of Japan’s lack of inflation as being related to a “liquidity trap”, and points out:
Nominal wages (compensation of employees) have been falling in absolute terms most of the time in Japan since 1998 (chart ULC and wages) and have found their way back above the zero line only recently but with growth rates below one percent. Unit labour costs (compensation per head divided by Gross domestic product per head), clearly the best predictor of inflation in all developed countries of the world including Japan (chart ULC and inflation), have been falling consistently since the mid of the 1990s. They were above zero only in years of sharp downswings of the economy and falling productivity. Real wages were on a random walk below and above zero with the latter associated with periods of absolutely falling prices and increased uncertainty.
Considering the non-monetarist inflation theories of demand pull and cost push it is obvious that against the deflationary forces of falling cost levels for the overall economy and sluggish demand from consumers monetary policy is powerless. The diminished expectations and the uncertainty of Japanese private households concerning their future income and deflation as such prevent private consumption from taking a lead role in a recovery. To call that constellation a liquidity trap is misleading.
That’s something that I had never managed to figure out from Mitchell’s writing, namely that Japan, while not going full bore neo-liberal only-a-small-public-sector-is-a-good-public-sector, still has allowed downward pressure on wages, which undermines domestic demand. As Flassbeck writes:
And exactly at this point the Japanese story turns into a more general story of the dangers of overly flexible labour markets that applies to the US after the crisis of 2008 as well as to large parts of Europe. The walk into that trap is usually triggered by sharply rising unemployment that is unrelated to specific labour market developments like wages rising too much. High unemployment as the result of a financial crisis, for example, is the scenario for pressure on wages and mass incomes even if wages and incomes were depressed already before the occurrence of the crisis. High unemployment and workers trying to price themselves flexibly back into the markets, as the OECD had once called it (UNCTAD, Trade and Development Report 2012), create the perfect storm for economic policy.
Yet this is exactly the medicine that keeps being prescribed to Eurozone countries. Whether Spain, Portugal, Greece, Italy, the supposed remedy is the same everywhere: make it easier to fire employees, lower wages, etc.