Japan's Lost Decade: What Have We Learned and Where Are We Heading?*

The lost decade has provided us a number of lessons. One of them is the limit of standard macroeconomics. This paper attempts to show that uncertainty plays a much more important role in the macroeconomy than most economists recognize. Once the economy is caught in an uncertainty trap, the effectiveness of standard policy necessarily weakens. The zero‐interest rate may well be a consequence of an uncertainty trap. In fact, whether or not the economy is caught in such an uncertainty trap distinguishes “depression” from the normal cyclical “recession.” The significance of demand‐creating innovation is another point I emphasize in this paper. In my view, a lack of demand‐creating innovation is a part of explanation of the lost decade. At the same time, this paper offers prospects for the future of the Japanese economy.