It is no uncertainty that Japan ‘s deflation in the last two decennaries was a rather important instance which can be used to analyze on the universe economic system. Japan has struggled against deflation for 20years since the exploded of existent estate monetary value bubble in 1991. Many jobs of deflation caused by the “ bubble economic system ” , so it is deserving to look at the procedure of it. As shown in figure 1, the land monetary values bubble was created during the period of 1986 – 1990. The ground of increasing in existent estate monetary value is that Bankss in Japan extended mortgage loaning at really low involvement rate in order to maintain their net income when more and more companies demoing penchant to raise capital by publishing bonds other than borrowing from Bankss during the period of 1975 – mid 1980s. Under this state of affairs, fast increased bank loans contributed a big per centum to high growing rates of GDP. The CPI rising prices was besides comparatively high during that period, ( Figure 2 )

Figure 1. Growth in residential land monetary values ( Vattipalli, 2004 )

As the consequence of utmost high existent estate monetary values, Bank of Japan started to prosecute a ordinance that restricts Bankss on the growing of their existent estate loans. After that, Bankss had to decelerate the rate of their existent estate growing, so that many house proprietors can non acquire adequate hard currency borrowed from Bankss to refund the involvement of their estate loans when their rental incomes can non cover the loans involvements. Under this cirmantance, many of those house proprietors prefer selling the houses to keeping them with high cost. Both decrease in the growing rate of existent estate and “ distress gross revenues ” of those existent estate created the crisp decrease in the existent estate monetary values.

At the same clip, stock monetary value besides began to fall from 1990. The growing rate of GDP moved down from the extremum since that twelvemonth although the land monetary values still kept lifting and BOJ besides continuously raised the price reduction rate at that clip. But after 1990, as the GDP growing fell away more aggressively, the rising prices began to diminish.

Figure 2 Rate of rising prices in Japan

Beginnings: Economic and Social Research Institute, Cabinet Office ; Statistics Bureau, Ministry of Public Management, Home Affairs, Posts and Telecommunications.

In Japan, the high growing rate of GDP, CPI and the high ratio of capital to end product accumulated by 1990 was high, it lead to high outlooks of the end product for the undermentioned several old ages was much higher than what happened in world. ( figure 3 )

Figure 3. US & A ; Nipponese Investment as % GDP


Besides, the fast decreased monetary values of existent estate caused balance sheet jobs for both families and companies. The ground is that the reduced value of existent estate which normally be used as collaterals by homeowners and companies will make jobs for companies get new loans.

Caused by a big figure of bankruptcies and balance sheet jobs, Bankss in Japan had non-performing loans jobs. In add-on, the declined in stock and existent estate monetary value agencies that bank capital declined, so that Bankss much more restraint on their loan devising, so they do non hold ability to retrieve the economic system ( Kwon, 1998, Brunner and Kamin, 1998, Bayoumi, 2000 ) .

In add-on, the hankering strengthened dramatically since early 1990, these phenomena increase the farther downward force per unit area on monetary values. All factors mentioned above lead to a crisp diminution in CPI in 1993. Figure 2 shows the alterations of CPI and GDP during that period. Harmonizing to the statistics, the CPI rising prices rate dropped to around 1 per centum by the terminal of 1993, and the GDP deflator decreased even much faster than CPI.

Since1991, the mean growing rate of Nipponese economic system stayed at merely around 0.9 per centum for 7 old ages ( Song and Jiang, 2009 ) . Although the growing rate moved up to 2.5 per centum in 1995 and 3.4 per centum in 1996, it fell to 0.2 per centum once more in 1997, when hit by the fiscal crisis in Asia. In 1998, the growing rate increased somewhat to 0.6 per centum, 0.5 per centum in 1999 and 0.9 per centum in 2000. In 2001, the GDP growing rate dropped to be negative ( -0.9 per centum ) because of the 911 in US. During that period, the consumer monetary value index ( CPI ) besides declined significantly. In order to retrieve the economic system, Nipponese authorities pursued some policies, but it was non every bit effectual as what expected. From 2003 to 2007, the growing rate of GDP in Japan stayed in a low degree. In 2008, Japan ‘s export sum to US decreased aggressively, in 2009, its net export to China besides declined by 21.4 per centum compared to last twelvemonth. At the same clip, the unemployment rate kept increasing. All those jobs are difficult to work out, so that Japan spend a long clip to fight against the deflation.

There were several grounds lead to neglect in work outing the jobs of deflation.

The failure of pecuniary policy and involvement rate policy could be blamed.

In order to do economic recovery, Nipponese economic policy was loosened ( Ahearne et, 2002 ) . BOJ decreased the nightlong call money involvement rate. Figure 4 shows that the involvement rate started to diminish from the extremum in 1991 and aggressively declined to approximately 0.5 per centum by 1995, and farther decreased to about 0 by 1999. In April of 1999, the BOJ pronounced that they would keep the involvement rate stay at zero until the deflation gone, that is what people called as zero involvement rate policy ( ZIRP ) . Under this policy, the economic system in Japan recovered and started to turn since the terminal of 1999 ; nevertheless, it dropped into a serious recession once more in 2003 after the ZIRP was abolished. ( Baba, Nishioka, Oda, Shirakawa, Ueda, Ugai, 2005 ) . After the ZIRP, BOJ besides pursued quantitative moderation policy ( QEP ) in 2001 in order to increase and supply an ample liquidness supply and keep it until the rate of alteration in CPI go back to positive. ( Baba, Nishioka, Oda, Shirakawa, Ueda, Ugai, 2005 ) .

Some bookmans argue whether these involvement rate policy and pecuniary policy are effectual on economic recovery. Krugman ( 1998 ) said that a lasting addition in money supply can assist raise rising prices rate, but increase in money supply merely in a short term would non be an effectual manner to diminish the rate of involvement and achieve that end. The diminution of involvement rate in 2003 besides supports the position mentioned above.

Figure 4. US & A ; Nipponese policy rates

There are some statements on whether the pecuniary policy was effectual to the economic recovery. Some economic experts believe that the pecuniary policy was uneffective because the involvement rate was already really low during the recession period ( Krugman, 1998 ) . He advocated that the BOJ should put an rising prices mark in order to take the economic system get rid of the liquidness trap. ( Miyagawa and Morita, 2010 ) . Besides, BOJ itself tested the relationship between the money factor and some other economic indices, such as existent GDP, involvement rates. The consequence of this trial conducted by utilizing Vector Error Correction Model showed that the long-term equilibrium relationship among money and those variables could non been found during the “ lost decennary ” , particularly after1997 ( Miyagawa and Morita, 2010 ) . That is, the pecuniary policy did non significantly impact the economic system. Another bookman Miyao ( 2005 ) besides did a similar trial to analyze the relationship. The consequence of his trial besides showed that there is no important relationship between money stock and monetary values. Besides, the money stock can non exactly predict existent GDP or monetary value degree in the economic system since the period of late ninetiess. Fujiwara ( 2006 ) found that pecuniary base do non significantly impact the economic system when the involvement rate was zero during the recession period. He got this consequence by utilizing VAR theoretical account and run the monthly index of CPI, long-term involvement rate collected from 1985 to 2004.

In contrast, some surveies argue that the pecuniary policy created positive effectual on economic recovery. Baig ( 2002 ) believes this decision based on his trial consequence generated by utilizing VAR theoretical account. But there was a restriction of his sample aggregation. That is, the information he used in the trial is collected from period from 1980-2001 without much informations from the zero involvement periods after 1999.

Honda and some other bookmans besides performed the trial on the quantitative moderation policy by utilizing the same theoretical account. In the appraisal procedure, industrial production, consumer monetary value, stock monetary values and current plus balance mark are variables chosen by them. The consequence showed that the pecuniary moderation positively affected the stock monetary value although there are some restrictions in their informations aggregation.

Based on these debts and what happened in Japan ‘s economic system, the pecuniary policy pursued by BOJ when the involvement rate at nothing was non effectual, because there were no other economic tools to imitate the adoption, so that pecuniary policy could non assist the economic system issue from the deep recession.

Failure in financial enlargement policy was another factor lead to unsuccessful work outing jobs of deflation in Japan. In 1992, the existent GDP aggressively declined, so the financial policy started expanded in that twelvemonth. Although Kuttner and Posen tested the effectivity of financial policy on existent GDP, revenue enhancement grosss and public outgos with informations collected from the period of 1976-1999 by utilizing VAR theoretical account. The trial consequence showed that the expansionary financial policy could efficaciously impact the economic system. But it could non convey a strong positive consequence on the economic system. The ground is that Japanese authorities pursued impermanent revenue enhancement cuts but non lasting. A lasting revenue enhancement cut can convey important positive impact on consumers ‘ income so that simulate their ingestion, but the nonsubjective factor existed in Nipponese society ( i.e. rapid ripening of the population ) limited authorities pursued a lasting revenue enhancement cuts ( Ahearne et. 2002 ) . So the modern-day revenue enhancement cut as a portion of financial policy could non positively impact the economic system. During 1990s, public debt in Japan increased while the orivate outgo decreasing.

Combined with these economic factors, some economic experts believe that the financial policy has lost its ability to impact the economic system in Japan during 1990s.

Lack of political leading besides made Japan could non be from the recession.The Nipponese authorities could non right acknowledge the chief ground of Japan ‘s recession. For case, Koizumi authorities believe the manner to halt the deflation is to reform the construction of the economic system, particularly the supply side. However, the supply side reforming has started around 20 old ages ago ( Koo, 2003 ) .

Besides, if the Mr. Koizumi could recognize that the balance sheet recession was an unseeable job hided behind the deflation and kept the financial stimulation at the degree of Prime Minister Mori, the balance sheet recession would be solved earlier. At the same clip, if most economic experts who tried to work out the jobs of deflation in Japan tried to non merely look at company balance sheets. They merely focused on those indices of GDP, rising prices rate, CPI and other economic factors.

The deficiency of political leading besides can be found in some policy errors. For case, the ingestion revenue enhancement hiking in 1997, which stifled nascent marks of recovery ; the alone awkwardness in disposing of NPLs ; and the bumbling trust on involvement rate cuts from 1985 to 1987 to cover with the deflationary impact of crisp yen grasp following the Plaza Accord. While it would be unjust to fault the bubble, plus deflation, and the liquidness trap entirely on Japan ‘s politicians and policymakers, it is accurate to state that policy misdirection has aggravated the jobs and prolonged the procedures of recovery.

Although the existent estate bubble explosion in the early 1990s, many predictors still kept optimistic toward Japan ‘s economic system in the undermentioned old ages. Comparing the prognosiss of growing and existent growing in GDP, those policy board members underestimated the worsening in GDP growing. Survey done by some institutes improved that the prognosiss decline much slower than existent GDP growing rates.

Besides, those Federal Reserve Board staffs did non do precise prognosiss for rising prices alterations when Japan ‘s economic system fell into recession. In mid-1990s, some of them forecasted that there would be no rising prices in Japan, but they ne’er tried to believe about that there might be a deflation in Japan before it really appeared. In Exhibit 1, it can be observed that some analysts even started to calculate a deflation until the late of 1990s.

Exhibit 1. Inflation Prognosiss ( aˆ¦ )

( The first saloon in each twelvemonth is existent rising prices rate, the 2nd 1 is the forecasted annual antecedently, the 3rd one is the forecasted annual antecedently )

In decision, Nipponese macro-economic policy was excessively timid. Those policy board staffs were non courageous plenty to anticipate the deflation after merely sing the rising prices in “ bubble economic system ” . Some of them even still foresaw rising prices in late of 1990s, when the deflation has appeared before the anterior twelvemonth. Fiscal enlargement policy did non created big and long impacts on the economic system, so it was unsuccessful to assist the economic system issue from the deflation. The pecuniary policy BOJ pursued merely lasted for a really short clip, so that it could non halt the continuously deflation in Japan. Besides, increased in money supply could non convey important positive effects on economic system when the involvement rate has fall to zero. Political factor was besides one of grounds lead to unsuccessfully halt the deflation.

BOJ tried many ways to work out the jobs of deflation. When the existent estate bubble exploded in 1990, they decreased the involvement after that. However, it was excessively late, declined in stock monetary value and ordinance limitation on growing rate of loans before the bubble flop has made a big figure of bankruptcies. Decreased in involvement rate after that could non efficaciously simulate investings and acquire the economic recovery. In order to prosecute involvement policy at exact right clip, it would necessitate those analysts in policy board forecast more exactly. In add-on, Japan was in a “ balance sheet recession ” , some more extremist steps of measuring should be introduced, and supervising power should be increased every bit good.

Japan was still on its manner to retrieve the economic system, nevertheless the tsunami and the Chernobyl accident may take to a diminution in growing rate of the economic system. The CPI index may besides diminish in the undermentioned clip.