The Japanese Economy

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explore the failure of Japanese monetary policy to deal with its present economic crisis.
Background and the Problem

During the 1980s, policy makers and economists throughout the world envied Japan as a successful model of a strong global economy. Real GDP growth ranged from 4%-6% from 1984 until the economic bubble burst in 1993. The Yen was regarded as one of the world’s leading currencies. Interest rates ranged from 4.5% to 6%. Japan operated at full employment. Household consumption increased by 2%. Foreign capital investments rose at unparalleled rates.
However, since the early 1990's, Japan's economy has been on a downward spiral. Real GDP growth declined to 0.3% in 1993, fell to 0% in 1997 (Posen, 1998a, Table 1.1), fell further to –2.4% in 1998 (Bank of Japan, Sep 1998), and is now at –3.5% (Rosenberger, 1999). The Japanese economy is operating at 8% below production capacity. Industrial production has fallen 7%. There’s a huge shortfall between actual GDP ...

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II Japanese Economic History

Japan’s postwar economic development can be summarized into six distinctive stages (Cargill 1996):

(1) 1945-50. A postwar adjustment and foundation for rapid growth provided by the Dodge Plan and the stimulus of the Korean War;

(2) 1950-70. A high growth period when real GDP grew 10% per year with moderate inflation of 5% per year;

(3) 1971-5. A short but turbulent period of “wild inflation,” yen appreciation, and the collapse of fixed exchange rates;

(4) 1976-85. A period of impressive macroeconomic performance with 3-5% growth rate per year, price stability, internationalization, and emergence of Japan as the world’s second largest economy and ...

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