Monetary case study

• What economic trend did Japan experience in the 1980s?


  Strong economic growth and optimism
• What fueled the surge in asset prices, real estate, and stocks in Japan during the 1980s?


  Low interest rates and easy credit availability
• What was the belief of Japanese banks regarding asset prices during the 1980s?


  That asset prices would rise indefinitely
• What action did the Bank of Japan take in the late 1980s regarding monetary policy?


  Started to tighten monetary policy by raising interest rates
• What happened to asset prices after the Bank of Japan raised interest rates?

  Asset prices declined and the bubble burst in 1990
• What was the impact of the burst bubble on Japanese banks?

  They had a significant amount of non-performing loans
• What economic conditions did Japan enter after the bubble burst?

  A period of deflation with falling prices and wages
• What monetary policy did the Bank of Japan use after the bubble burst?

  Expansionary monetary policy
• What was the trend of the Bank of Japan's interest rate from 1991 to the late 1990s?


  Reduced progressively from 6% to almost zero
• Despite the Bank of Japan's efforts, what was the state of the economy in the late 1990s?


  The economy remained stagnant with low growth and high levels of non-performing loans
• What were the reasons for Japan's economic failure in the 1990s?

  • Firms and banks focused on repairing balance sheets by paying down debt
  • Liquidity trap: Interest rates close to zero, low confidence
  • Demographics: Aging population more likely to save than consume
  • Global economic environment unfavorable for exports
• What was the effect of the liquidity trap on consumers and firms in Japan?


  They had low confidence
• What demographic challenge did Japan face in the 1990s?

  An aging population
• How did the aging population affect consumer behavior in Japan?

  They were more likely to save rather than consume
• What was the global economic environment like for Japan during the 1990s?


  Not favorable for exports