Policy responses to the post-bubble adjustments in Japan : a tentative review

日本銀行金融研究所 · Naruki Mori · Hiroo Taguchi

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency European Monetary and Fiscal Policies

Abstract

This paper provides a very tentative review of the monetary and prudential policy responses to the post-bubble adjustments in Japan. The adjustments after the collapse of the bubble have been prolonged due to (1) the rapid downward revision of the expected economic growth rate; (2) balance-sheet adjustments on the part of firms; and (3) the malfunctioning of the financial intermediary system stemming from its nonperforming-asset problem. We use four yardsticks, Marshallian k, Taylor rule, the equity yield spread, and the short-term real interest rate for assessing the monetary easing. The results suggest that the timing of policy reversal was swift and the magnitude of easing in the early phase could be viewed as broadly adequate for dealing with a normal business cycle. It is possible to argue that the effects of the bursting of the bubble might have not been sufficiently taken into account. It should be noted the outcome would not have differed greatly even if the drastic monetary easing that eventually took place had been decided at an earlier point in time without a fundamental cure of the nonperforming- asset problem. A considerable achievement of prudential policy in the period under review is that systemic risk was avoided with the cost being delayed in establishing a legal framework for handling troubled financial institutions and in organizing a comprehensive safety net. As a result of this delay, it took a long time to deal with the nonperforming- asset problem. This, in turn, posed a serious drag on the economy. Our preliminary conclusion about the lesson we should draw from this experience is the importance for the Bank of Japan of identifying the precise impacts of shocks on the economy as well as their transmission mechanism promptly and thereby minimizing adjustment costs. It should also be conducive for the Bank to address actively structural issues that may influence the effectiveness of its policy measures.

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References

1993Discretion versus policy rules in practice 2000Errors in the measurement of the output gap and the design of monetary policy 2000The asset price bubble and monetary policy : Japan's experience in the late 1980s and the lessons 1999Causes of the Long Stagnation of Japan During the 1990s: Financial or Real?2001The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt 1999Monetary Policy under Zero Inflation: A Response to Criticisms and Questions Regarding Monetary Policy 2000Low Inflation, Deflation, and Policies for Future Price Stability

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