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Lessons from Japan's Economic Policies: Navigating the Aftermath of the Bubble Burst

This detailed analysis explores the Bank of Japan's (BOJ) monetary policies following the financial crisis of 1997-1998. It discusses the implementation of a zero-interest rate policy to counter deflation, the introduction of Quantitative Easing (QE), and the eventual exit strategy as the economy seemed to recover due to the IT boom. Key lessons emphasize the importance of coordinated fiscal and monetary policies, recognizing false recoveries, and the necessity of restoring the financial system post-crisis, especially regarding asset price declines and their impact on the banking sector.

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Lessons from Japan's Economic Policies: Navigating the Aftermath of the Bubble Burst

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  1. ＢＯＪ　after the burst of the bubble Yoichi Takita, Nikkei

  2. 1999.2 Zero interest rate policy • Serious financial crisis in 1997~1998 • Huge fiscal stimulus in 1998 • Jump up of long term interest rate • BOJ declared zero interest policy until deflationary pressure eases

  3. 2000.8 Exit from Zero interest rate • Japanese economy looks like recovery thank to IT boom • BOJ raised Short term rate by 25BP • Just after the Exit IT boom was over

  4. BOJ stepped into Quantitative Easing • 2001.3 BOJ stepped into QE • Continue zero interest until Core CPI will turn to be plus • Policy target to the volume of Bank deposit on BOJ • To increase Japanese Government Bond in order to inject money

  5. Exit from QE • 2006.3 BOJ got rid of QE • 2006.7 BOJ raised Short term interest rate by 25BP • Japanese economy is recovering and Core CPI is turning to be positive

  6. Lessons from Japanese experience • Coordination between fiscal and monetary policy is crucially important • Do not misjudge false dawn as real dawn • To restore financial system is also crucially important especially after the burst of the huge bubble because of balance sheet problem in private sector

  7. Deflation or Asset price deflation • In Japan deflation was rather modest. Cumulative fall of CPI is 3% between 1997~2004 • Asset price decline was serious; Equity and Real estate price declined roughly 80% from top to bottom • Such a sharp decline hit the BS especially Bank’s BS

  8. Need of political decision • To inject public money to injured Banks is crucially important • But it is difficult facing the protest from the public

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