In fl ation Targeting and Japan : Why has the Bank of Japan not Adopted In fl ation Targeting ?

By any historical or cross-sectional standard, the Japanese economic slump from 1992 to 2004 has been quite unusual. The economy that was once regarded as ʻnumber one ̓fell into a state of low growth, falling prices, and chronic banking crises for more than a decade.2 The average growth rate from 1993 to 2003 was just above 1 per cent, in contrast to the average growth rate of 4 per cent between 1975 and 1992. Slow growth was accompanied by disinfl ation in the fi rst half of the 1990s and, eventually, defl ation since the mid 1990s. The defl ation in prices was associated with a shrinking of the Japanese economy – a rare phenomenon among advanced economies. From 1997 to 2002, Japanese nominal GDP (in yen) shrank by 4 per cent, while the nominal GDP of the United States (in US dollars) increased by 25 per cent.