Paul Krugman's thoughts on Japan from around a decade ago are quite interesting.  He wrote:

But it is quite a stretch to argue that Japan in the 90s is a parallel case [to the US from the Great Depression through World War II]. It might be; but an at least equally, if not more, plausible story is that Japan has a structural excess of saving over investment, even at a zero interest rate; in that case a temporary fiscal stimulus will produce only temporary results.

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

The "exotic" multiple-equilibrium story must not really be that exotic, since just above this he entertains it as an explanation of the 1996 Asian financial crisis, and of the apparent success of WWII spending in lifting the US sustainably out of depression.

The current situation certainly differs from Japan's in the 90's in many ways, but it does raise the question which of those ways are likely to render fiscal policy more effective for us now, than for Japan then.  Of course, I think no-one would argue that we have a structural excess of savings over investment.  But it does appear that the propensity to save may have shifted up at least temporarily.  Do we face an S-shaped consumption-income relation?  If this slump drags on too long, will we need to target inflation?

At the time Krugman wrote these pieces, he felt the multiple-equilibrium possibility looked dubious because there had been prolonged fiscal stimulus, but it  hadn't rendered itself unnecessary.  Others (see the article linked below) think apparently think it just wasn't large enough, and intense enough over a short period of time, to succeed.  And there are those who think that Japan didn't clean up its banking problem effectively---that its banks still had the balance sheet problems that, Krugman argues, fiscal stimulus can provide breathing room to work out.

Greg Mankiw links to an interesting article on Japan, that largely confirms the continuance of the situation Krugman described in 1999---fiscal stimulus not having rendered itself unnecessary by producing a self-sustaining recovery.  Make sure and read past the first page.  It would be interesting to further investigate the content, and methodology, of the Institute for Local Government study that concluded:

every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger boost of 1.74 trillion yen, the report found. But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only 1.37 trillion yen, mainly by creating jobs and other improvements like reducing travel times.

Mankiw has his own suggestion for a stimulus plan, about which a bit more in the next post.