Monetary Transmission at Low Inflation: Some Clues from Japan in the 1990s

The paper analyzes the performance of the Japanese economy from 1985 to 1999. It compares different explanations of slow growth and prolonged recession. Using both bivariate comparisons and statistical tests, the paper concludes that the maintained growth rate fell after 1992. Also, the data suggest that the recession early in the 1990s was induced by a decline in money growth. In contrast, the recent recession was induced mainly by a fall in real exports. Failure to allow the nominal exchange rate to depreciate forced deflation and increased the costs of adjusting to reduced export demand. The main policy conclusion calls on the Bank of Japan to pursue a more expansive policy to end deflation. This policy would depreciate the yen, but it would end the deflation that is costly to Japan and its neighbors.