POLICY MAKING IN DEFLATIONARY JAPAN*

Koichi Hamada

The Japanese Economic Review, 2004, vol. 55, issue 3, 221-239

Abstract: The prolonged recession and deflation in Japan since 1990 presents novel problems to economists. The recession was certainly triggered by real factors such as the slowing down of capacity growth. At the same time, it was aggravated by the monetary contraction in the early 1990s and the inability of the monetary policy to cope with deflation, a fortiori a monetary phenomenon. With the zero‐bound interest rate, traditional monetary policy is of limited effect, and unconventional monetary policy, such as inflation (or price‐level) targeting, should be employed instead, in order to change the persistent deflationary expectations in the public.

Date: 2004
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