Balance Sheet Recession
Balance Sheet Recession is a type of recession where liquidity in the financial system is trapped on the bank balance sheet. Although central banks may inject liquidity, the money supply may fail to grow because there is a lack of loan demand. This occurs when businesses and/or consumers focus on reducing debt and improving their balance sheets.
Example:
Japan Since the Late 1980s
- After Japanese stock-market burst in the late 1980s, Japanese companies had bad balance sheets—too much debt
- Japanese companies started to repay debt - which reduced the money supply
- At the same time, the Japanese government went deep into debt and printed base money
- A recession still ensued and inflatino never went up because companies were reducing debt faster than the government could create it
Other Examples