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Japan's Deflation, Problems in the Financial System, and Monetary Policy

Author

Listed:
  • Baba, Naohiko

    (Bank of Japan)

  • Nishioka, Shinichi

    (Bank of Japan)

  • Oda, Nobuyuki

    (Bank of Japan)

  • Shirakawa, Masaaki

    (Bank of Japan)

  • Ueda, Kazuo

    (Bank of Japan)

  • Ugai, Hiroshi

    (Bank of Japan)

Abstract

This paper offers three analyses of Japan's macroeconomic experience during the post-1990 period. First, we analyze various facets of deflation during the period, arguing that the deflation of general prices has by no means been a major factor for the stagnating economy. In contrast, the deflation of asset prices was closely related to the economic difficulty of the period. In particular, the negative shocks generated by sharp declines in asset prices in the early 1990s have been propagated and amplified by their interaction with the deterioration in the condition of the financial system. Some statistical evidence supports this view. Second, we analyze the effects of monetary policy adopted by the Bank of Japan (BOJ) to fight deflation since the late 1990s. Given that short-term interest rates were already nearly zero in the mid-1990s, policy measures have focused on creating monetary easing effects beyond those created by zero interest rates alone. We show that the zero interest rate policy, which includes a commitment to maintain a zero interest rate for a longer period than that suggested by a baseline monetary policy rule, has produced strong effects on expected future short-term interest rates and thus the entire yield curve. Third, we argue that the BOJ has successfully prevented a repetition of the 1997-98 type liquidity crisis by directing market operations at addressing the financial-sector problems. These operations have taken the form of containing risk and liquidity premiums, particularly in the money market, through proactive provision of liquidity as well as the BOJ's own risk- taking activity.

Suggested Citation

  • Baba, Naohiko & Nishioka, Shinichi & Oda, Nobuyuki & Shirakawa, Masaaki & Ueda, Kazuo & Ugai, Hiroshi, 2005. "Japan's Deflation, Problems in the Financial System, and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(1), pages 47-111, February.
  • Handle: RePEc:ime:imemes:v:23:y:2005:i:1:p:47-111
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    References listed on IDEAS

    as
    1. Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters,in: The Economics of an Ageing Population, chapter 2 Edward Elgar Publishing.
    3. Nakakuki, Masayuki & Otani, Akira & Shiratsuka, Shigenori, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 71-99, May.
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    5. GlennD. Rudebusch & Tao Wu, 2008. "A Macro-Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, July.
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    7. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
    8. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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