Monetary Policy in Japan: Problems and Solutions

Monetary Policy in Japan:

Problems and Solutions*

Takatoshi Ito

University of Tokyo

and National Bureau of Economic Research

and

Frederic S. Mishkin

Graduate School of Business, Columbia University, and

National Bureau of Economic Research

For the Solutions conference, June 19-20, 2004

Roppongi, Tokyo

Conference Version

*

For presentation at the US-Japan Conference on the Solutions for the Japanese Economy,

sponsored by the Center on Japanese Economy and Business, Columbia Business School and

Research Center for Advanced Science and Technology, The University of Tokyo, June 19-21, 2004.

Any views expressed in this paper are those of the author only and not those of University of Tokyo,

Columbia University or the National Bureau of Economic Research. Comments from Hugh Patrick

and David Weinstein are appreciated. The authors are grateful to Shoko Nakano for her excellent

work as a research assistant.

Introduction

The Japanese economy has been underperforming for more than a decade. The average growth rate

of real GDP over the past 12 years has been just above 1 percent, and the nominal GDP has been

shrinking since 1997 due to deflation. Nominal GDP for 2003 is 4 percent below what it was in

1997. In order to stimulate the stagnant economy, the government has cut taxes and increased

expenditures.

As a result the government debt/GDP ratio has risen to 150 percent, an

unprecedented level for an advanced country in peacetime. The CPI has been declining since 1998,

while the GDP deflator has been declining since 1995. Stock prices and land prices have been

declining for the decade, with the Nikkei 225 index going down in the Spring of 2003 to a low below

8,000, one-fifth of the peak at the end of 1989.

There is no doubt that the economy is in deflation.

Important questions about the deflation are how much deflation is due to demand factors and how

much to supply factors; and whether deflation is a result of stagnant...