Análisis Económico

It would be hard to deny that, Japanﾒs macroeconomic experience during the last two decades has
been quite extraordinary. Stock and land prices soared to peak levels in the late 1980s and early
1990s respectively, giving way subsequently to a decade-long correction process. In April 2003, the
Tokyo Stock Price Index (TOPIX) reached a low of 773.1, the same level as in 1984. Declining asset
prices have hit the banking system severely. Although taxpayersﾒ money, bank earnings and bank
capital, in total amounting to about 20% of GDP, have been used to address the non-performing loan
(NPL) problem, the banking system has not fully recovered yet. Business fixed investment continued
to suffer from the excesses of the late 1980s and the impaired financial system. The economy has
grown at a minimal 1.0% rate on average during 1992-2002, a period that has been called a ﾓlost
decadeﾔ.

The weak condition of the economy has been reflected in general prices. The GDP deflator and the
consumer price index (CPI) have been declining since 1995 and 1998, respectively. The Bank of
Japan (BOJ) started to ease in the summer of 1991, then lowered the call rate by almost 800 basis
points in the following four years, bringing the rate to under 0.5% in the summer of 1995. This,
however, was not enough to counteract the deflationary forces. Since 1999, the call rate has been
lowered to zero with the exception of the August 2000-February 2001 period. In addition, the BOJ
went still further in adopting several unconventional policy measures. At the time of the writing of this
paper, deflationary forces seem to be finally easing, but the CPI inflation rate has not clearly turned
positive yet.

The purpose of this paper is threefold. First, it aims to survey various discussions of the so-called ﾓlost
decadeﾔ from a macroeconomic perspective. Second, it reviews the sequence of how monetary policy
responded to the weak economy during the decade and provides some preliminary analysis of the
effects of policy measures adopted. Third, it explains how some of the monetary policy measures
adopted were geared to alleviating problems in the financial system and discusses some of the
unexpected consequences of such policy measures.

In our survey of Japanﾒs macroeconomic fluctuations, we attempt to show that the deflation of general
prices has not been the root cause of the stagnation of the economy, but rather has been just one
manifestation of more fundamental problems. The basic driving force of the stagnation seems to have
been the need to work off the excesses in capital, labour and debt built up in the late 1980s and early
1990s. Sharp declines in asset prices have added to the need for adjustment by generating various
negative financial accelerator effects, including the NPL problem. We will pay more attention to the
description of negative financial accelerator effects since they are less well understood aspects of the
stagnation.