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It Takes More than a Bubble to Become Japan

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  • Adam S. Posen

    () (Peterson Institute for International Economics)

Abstract

Did monetary easing in the 1980s cause Japan's bubble, as is often suggested? Drawing on both a new cross-national consideration of the monetary policy-asset price linkage and a reexamination of what actually occurred in Japan during 1985-90, I conclude that the bubble was just as likely to occur, whatever monetary policy within reason would have done. Did the bubble's bursting cause Japan's Great Recession? In fact, Japan's recession of 1990-94 was mild, and only a combination of policy mistakes turned this normal recession into extended stagnation. This is borne out by cross-national investigation suggesting that the frequency of extended downturns following asset booms is relatively low. Comparing the post-bubble response of the US and Japanese economies, did the bubble itself impede restructuring? Given very different responses in the two economies to similar bubbles, a bubble itself is not sufficient to cause real-side disruption. Central bankers should learn from Japan's bubble the benefits of a more thoughtful approach to assessing potential growth and of easing rapidly in the face of asset price declines and not be concerned with targeting asset prices or pricking bubbles per se.

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  • Adam S. Posen, 2003. "It Takes More than a Bubble to Become Japan," Working Paper Series WP03-9, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp03-9
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    Cited by:

    1. Markus K. Brunnermeier & Isabel Schnabel, 2014. "Bubbles and Central Banks: Historical Perspectives," Working Papers 1411, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 31 Oct 2014.
    2. Fernando Alexandre & Pedro Bação, 2005. "Monetary policy and asset prices: the investment channel," NIPE Working Papers 3/2005, NIPE - Universidade do Minho.
    3. Illing, Gerhard & Ono, Yoshiyasu & Schlegl, Matthias, 2018. "Credit booms, debt overhang and secular stagnation," European Economic Review, Elsevier, vol. 108(C), pages 78-104.
    4. Mishkin, Frederic S., 2017. "Rethinking monetary policy after the crisis," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 252-274.
    5. Canares, Michael, 2009. "Macro-economic trends and their impacts on forests and forestry in Asia and the Pacific, outlook to 2020," MPRA Paper 28970, University Library of Munich, Germany.
    6. Maria Socorro Gochoco-Bautista, 2008. "Asset prices and monetary policy: booms and fat tails in East Asia," BIS Working Papers 243, Bank for International Settlements.
    7. Bank for International Settlements, 2008. "Financial market developments and their implications for monetary policy," BIS Papers, Bank for International Settlements, number 39, June.
    8. W. R. Garside, 2012. "Japan’s Great Stagnation," Books, Edward Elgar Publishing, number 14624.
    9. Gochoco-Bautista, Maria Socorro, 2008. "Asset booms and fat tails in East Asia: Symmetric or asymmetric risks?," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1617-1640, December.
    10. Belke, Ansgar H. & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute of Labor Economics (IZA).
    11. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.
    12. Nouriel Roubini, 2006. "Why Central Banks Should Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 87-107, May.
    13. Kenneth N Kuttner, 2008. "Equity prices as leading indicators: the Asian experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial market developments and their implications for monetary policy, volume 39, pages 167-192, Bank for International Settlements.
    14. Michael D. Bordo & David C. Wheelock, 2004. "Monetary policy and asset prices: a look back at past U.S. stock market booms," Review, Federal Reserve Bank of St. Louis, vol. 86(Nov), pages 19-44.
    15. Bo Jiang & Bruce Philp & Zhongmin Wu, 2018. "Macro stress testing in the banking system of China," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(4), pages 287-298, November.
    16. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
    17. Kenneth Kuttner, 2011. "Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription?," Department of Economics Working Papers 2011-04, Department of Economics, Williams College, revised Jun 2011.
    18. Adam S. Posen, 2006. "Why Central Banks Should Not Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 109-124, May.
    19. Barry Eichengreen, 2008. "Should there be a coordinated response to the problem of global imbalances? Can there be one?," Working Papers 69, United Nations, Department of Economics and Social Affairs.

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    More about this item

    Keywords

    deflation; bubbles; monetary policy; Japan;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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