Financial strains and the zero lower bound: the Japanese experience
AbstractWe analyse the case of persistent deflation in Japan by estimating the long-run Phillips curve equation using the GDP deflator and the estimated GDP gap. Then we show that the Japanese banking sector has been losing money since the early 1990s due to the heavy credit cost and that it is quickly running out of capital. The Japanese government has been preventing a banking crisis by providing a blanket guarantee on most banking sector liabilities. However, the government is facing a rapid deterioration of financial conditions due to massive budget deficits and the negative nominal GDP growth in recent years. In spite of the quantitative easing of monetary policy, the traditional interest rate policy has lost its potency due to the zero lower bound of nominal interest rates and accelerating deflation. Without stopping deflation quickly, the Japanese government may face capital flight due to the uncontrolled budget deficit. In order to cope with this unusual situation, two nontraditional policy measures are proposed: massive open market purchases of high-quality real assets and a negative nominal interest policy by levying tax on all government-guaranteed yen financial assets.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 141.
Length: 35 pages
Date of creation: Sep 2003
Date of revision:
Financial strains; zero lower bound; Japanese experience;
Other versions of this item:
- Mitsuhiro Fukao, 2006. "Financial Strains and the Zero Lower Bound: The Japanese Experience," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 203-232 National Bureau of Economic Research, Inc.
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