The Bubble and the Lost Decade

Gary Saxonhouse and Robert Stern

The World Economy, 2003, vol. 26, issue 3, 267-281

Abstract: In this overview of the Symposium papers, we note that the bubble that occurred in Japan's asset markets in the late 1980s came at a time when the conventional indicators of Japan's economic performance were relatively stable. Following the collapse of the bubble, neither the Bank of Japan (BOJ) nor the Ministry of Finance (MOF) took timely and effective measures to deal with the recession that followed. While the evidence suggests that looser fiscal policy would have been ineffective, monetary policy measures might have worked. However, the BOJ followed a relatively tight monetary policy in 1991–93. In the face of the liquidity trap that ensued in the last of the 1990s, the conventional tools of stabilisation policy appeared to be of limited use. To help the Japanese economy to recover from the ‘lost decade,’ we thus discuss a number of unconventional and bold measures that the BOJ and MOF could pursue. It appears, however, that the political will is absent to undertake such measures. So long as this is the case, the effects of the lost decade will continue to act as a drag on the economy.

Date: 2003
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