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Japan: Economic Policy Essay

1161 words - 5 pages

Monetary Policy History

This paper starts with the overview of Japan’s economic development after World War II, in 1945 to the year 2013. The economic condition over time has direct effect on the country’s monetary policy. Japan has had a successful economy reconstruction after the World War II, focusing on high-tech, energy-saving and electronic industry. Till early 1970s, Japan’s economic development has already caught up to the US and European countries with an income ratio of 1 to 2.5 between Japan and US. Before 1973, Japan has an expansionary monetary policy, large scale public investment in railways and highways construction. Because of Japan’s energy dependency outside of its territory, the oil shocks in 1973-1974 has caused high inflation and has put Japan’s economy into recession or ‘stagnation’. Facing the economic stagnation, especially the inflation, Japan has been forced to tighten its monetary policy. Bank of Japan which is the monetary authority has been criticized to mishandling the high inflation and since then Bank of Japan began to target monetary growth to avoid inflation.

Facing the difficulty of economic stagnation, Japan still managed to achieve slow economic growth. In mid-late 1970s, the expansionary monetary policy has been reactivated to boost the economy through buying government bonds. In mid-1980s Japan has become the world’s largest exporter, the world’s largest creditor and the major financial player with huge amount of foreign currency reserves. Japan has had large trade surplus over US. Japanese yen has become a major currency highly associated with US dollars. However this has also made Japanese yen vulnerable because the appreciation of yen would associate with the loss of competitiveness of Japanese exporting products. This concern has let Japan’s Ministry of Finance to issue the initiatives to tighten the budget and cut expenditures.

Between the year 1986-1987, Because of the large capital inflow from international market and in order to reduce the trade surplus with US and avoid the trade friction with US, Prime Minister Nakasone at that time has ordered to go back to implement expansionary monetary policy to boost domestic demand. This change has been considered as one of the reasons for the bubble burst in the beginning of 1990s. The bubble burst, later bank crisis and Asia financial crisis have put Japanese economy into long term recession.

In order to stimulate the economy, Bank of Japan has been forced to reduce the interest rate to zero in 2000 and has dramatically increased the money supply in this period. Even by doing that, deflation set in along with consumption and investment depression. Until today, Japan is still under deflation and has a interest range of 0% to 0.1%. The deflation has lasted 15 years. Japan’s interest rate averaged 3.17 percent from 1972 to 2014. The highest point of 9 percent in december 1973 and lowest point of 0 in February 1999.

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