The Development of Economics in Japan

From the Inter-war Period to the 2000s

Toichiro Asada

• Publisher: Routledge
• Year: 2014
• eBook ISBN: 9781317962168
• Topic: Business
• Subtopic: Business General
• Index: Business

This book covers the development of economics in Japan from the inter-war period to the 2000s focusing on the international theoretical contributions of Japanese economists. The first focal point is the international contributions of Japanese economists before and after World War II. The second focal point is the controversies concerning macroeconomic policies in Japan in the period of the 'Great Depressions' in the 1930s and the period of Japanese 'Great Stagnation' in the 1990s and the early 2000s.

In short, economics in Japan is considered from both a theoretical and a policy-oriented point of view. The intimate relationship between economic theory, thought and policy is also fully examined, as well as the development of both academic and non-academic (practical) Japanese economics and the influence of Marx, Walras, Keynes, Fisher and Cassell.

Part II
Economics of the lost twenty years in Japan from the 1990s to the 2000s

4Controversies regarding monetary policy and deflation in Japan from the 1990s to the early 2000s

Asahi Noguchi

1 Introduction

The global economic crisis initiated by the burst of the US subprime bubble and the subsequent bankruptcy of Lehman Brothers Holdings Inc. in September 2008, the “Lehman Shock,” drastically changed the way that governments and central banks throughout the world conducted macroeconomic policies. The crisis restored the concept of Keynesian fiscal policy and the use of fiscal measures of governmental spending and taxation to stabilize output and employment in an economy by expanding or contracting its aggregate spending. Since John Maynard Keynes (1883–1946) manifested this concept in The General Theory (1936), it occupied the way politicians and policy officials thought about macroeconomic policies, at least until the 1960s (Keynes, 1978). However, subsequent criticism by certain leading economists of Keynesian macroeconomics crucially undermined the notion. It gradually decayed thereafter and was supposed to be literally useless precisely until the crisis began. The gravity of the crisis eventually forced many governments to resort to the Keynesian fiscal policy that was ignored for a long time, although stubborn opposition to the policy was rampant.

The change was no less drastic for monetary policy. Until the crisis, few countries experienced reaching the lower bound of interest rates. In The General Theory (1936), Keynes referred to a situation in which injections of money into an economy by a central bank could no longer lower interest rates, later called a “liquidity trap.” Although the concept of a liquidity trap subsequently became prevalent in Keynesian literature, the actual case cited as its historical example was usually confined to that of the US in the 1930s when the short-term interest rate as measured by three-month Treasuries was lowered to 0.05 percent during the Great Depression. However, as the latest global crisis proceeded, most of the major developed countries, including the US, the UK, Japan, and the countries in the euro region, consequently had to encounter a situation in which the short-term interest rate was lowered to its minimal level. Therefore, the central banks could no longer use the conventional way of lowering policy interest rates to stimulate investment and consumption of private corporations and households. This situation compelled the central banks to initiate various measures of unconventional monetary policies, or monetary policies other than manipulating the policy interest rate.¹

This article examines the controversies surrounding monetary policy and deflation in Japan from the 1990s to the early 2000s. The purpose is to obtain insights and lessons on how novel and unconventional economic policies are accommodated and implemented during economic crises. Although many countries confronted the annoying situation of a lower bound on interest rates after the Lehman Shock for the first time since World War II, the case was not new for Japan. Japan already experienced the same situation before the most recent global economic crisis. In February 1999, the Bank of Japan (BOJ) first introduced a zero interest rate policy (ZIRP) in the face of an economic downturn triggered by the successive bankruptcies of several major financial institutions from the end of 1997 to the middle of 1998. This first attempt of the policy was temporary because the BOJ suspended the ZIRP in August 2000 and rejected various oppositions to its suspension. Unfortunately for the BOJ, just after this suspension, the worldwide economic boom motivated by the development of information technology (IT) that swelled around the end of the 1990s collapsed. This situation forced the BOJ to return to the ZIRP and to establish an unconventional monetary policy called quantitative easing (QE). Consequently, this quantitative monetary easing policy executed by the BOJ from March 2001 to March 2006 paved the way for the unconventional monetary policies that the central banks around the world adopted after the Lehman Shock.

Many similarities existed between Japan’s case and the cases after the Lehman Shock regarding the process of implementing an unconventional monetary policy and its general background. The latest global economic crisis was primarily initiated by the bursting of the US subprime bubble. Similarly, Japan’s economy experienced an unprecedented expansion of the bubble, in particular a cumulative increase in land prices and stock prices around the end of the 1980s, and then its burst at the beginning of the 1990s. The burst of the US subprime bubble and the subsequent decline in asset prices drastically worsened the financial positions of banking institutions. Similarly, the burst of Japan’s bubble resulted in many formerly outstanding financial institutions facing difficulty. In both cases, the bankruptcy of some leading financial institutions eventually triggered the systematic crisis of the entire financial market, although realization of the financial panic in Japan was postponed until the end of 1997 by various measures invented both publicly and privately. In any event, both financial panics eventually caused a severe downturn in the economy as a whole.

As the global economic crisis after the Lehman Shock led many central banks to the lower bound of policy interest rates and forced them to set out unconventional monetary policies, the BOJ was also enforced to adopt ZIRP at the end of the 1990s and QE at the beginning of the 2000s. However, the process of adopting them was far from peaceful. These policies were introduced only after many twists and turns. Heated controversies in both journalism and academia ensued over whether or not unconventional monetary policies should be implemented. The BOJ itself was always rather reluctant to embark on any unpracticed policy measure. The BOJ adopted ZIRP and QE not so much in a keen manner as in a willy-nilly fashion. Therefore, that the BOJ initiated unconventional monetary policies ahead of the other central banks was very ironic because it was forced to do so for at least two reasons. One reason was the external and internal criticism of the BOJ’s conservative policy stance. The other reason was the aggravation of deflation in Japan, particularly since the economic downturn of 1997–1998.

However, this latter reason was not as definite, at least in the beginning. When symptoms of deflation became conspicuous in the Japanese economy, specifically after 1997, deflation was not necessarily recognized as a bad thing. Rather, whether deflation should be accepted or contained was a main focus of the controversy at this stage. Apparently, the BOJ sympathized with the “good deflation” theory that was in fashion within journalistic circles until the beginning of the 2000s. Only after the harmful effects of deflation became sufficiently apparent and, thus, the call for measures against...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Notes on contributors
• Preface
• General introduction
• Part II From the inter-war period to the 1970s
• Part II Economics of the lost twenty years in Japan from the 1990s to the 2000s
• Index