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The Bubble Economy and the Bank of Japan
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| | Unformatted Document Text:
1
1.
1.
1.
1. Introduction
Introduction
Introduction
Introduction
In this paper, I will examine the popular opinion that the dependent central
bank caused the bubble economy in the late 1980’s in Japan. I will argue that the Bank of Japan was independent from the prime minister and the Ministry of Finance to an extent that was important and that the Bank ultimately decided to loosen monetary policy on its own volition.
Most of the researchers regard the bubble economy of the late 1980’s as a main
cause of the stagnation of Japanese economy in the 1990’s. Yoshikawa (1999) argues, for example, that the recession in the first half of the 1990’s was caused by the stock adjustment and the reduction of investment as a reaction to the economic bubble; and the recession in the latter half of the 1990’s was caused by the reduction of investment as a result of tighter bank lending and finance retrenchment policy
2
. Another cause
that made the recession serious was the change of the bank behavior due to the increase of bad loans. Throughout the 1990’s, according to the empirical analyses of economists, the drop of the property price caused by the collapse of the bubble economy deteriorated the balance sheets of enterprises and reduced the security price of their properties, which resulted in the credit crunch and decreased investment. They also argued that in the autumn of 1997 when concerns about the financial system deepened, the bad loan problem of banks that had continued for a long time decreased banks’ capital. This intensified tighter bank lending, which meant the decline of the financial mediation function of banks
3
.
Many economists, political scientists, and journalists insist that the Bank of
Japan’s extremely low level of independence was the main reason behind the inflation of the bubble economy. Their explanation goes as follows. The U.S. administration demanded that the Japanese government expand domestic demand to reduce its huge current account surplus with the U.S. However, the Ministry of Finance resisted increases in fiscal expenditures, instead prioritizing fiscal reconstruction. Thus, the Ministry demanded that the Bank of Japan loosen monetary policy. The Bank of Japan complied, unable to reject the Finance Ministry’s demand due to its lack of independence from the Ministry. In February 1987, the Bank of Japan lowered the official discount rate to 2.5% and kept it at that level until May 1989. This excessively loose monetary policy drastically increased financial liquidity, stimulating a rapid
2
Yoshikawa 1999, 7-41.
3
Shiratsuka, Taguchi, and Mori 2000, 116-119.
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| | Authors: Kamikawa, Ryunoshin. |
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1
1.
1.
1.
1. Introduction
Introduction
Introduction
Introduction
In this paper, I will examine the popular opinion that the dependent central
bank caused the bubble economy in the late 1980’s in Japan. I will argue that the Bank
of Japan was independent from the prime minister and the Ministry of Finance to an
extent that was important and that the Bank ultimately decided to loosen monetary
policy on its own volition.
Most of the researchers regard the bubble economy of the late 1980’s as a main
cause of the stagnation of Japanese economy in the 1990’s. Yoshikawa (1999) argues,
for example, that the recession in the first half of the 1990’s was caused by the stock
adjustment and the reduction of investment as a reaction to the economic bubble; and
the recession in the latter half of the 1990’s was caused by the reduction of investment
as a result of tighter bank lending and finance retrenchment policy
2
. Another cause
that made the recession serious was the change of the bank behavior due to the
increase of bad loans. Throughout the 1990’s, according to the empirical analyses of
economists, the drop of the property price caused by the collapse of the bubble economy
deteriorated the balance sheets of enterprises and reduced the security price of their
properties, which resulted in the credit crunch and decreased investment. They also
argued that in the autumn of 1997 when concerns about the financial system deepened,
the bad loan problem of banks that had continued for a long time decreased banks’
capital. This intensified tighter bank lending, which meant the decline of the financial
mediation function of banks
3
.
Many economists, political scientists, and journalists insist that the Bank of
Japan’s extremely low level of independence was the main reason behind the inflation
of the bubble economy. Their explanation goes as follows. The U.S. administration
demanded that the Japanese government expand domestic demand to reduce its huge
current account surplus with the U.S. However, the Ministry of Finance resisted
increases in fiscal expenditures, instead prioritizing fiscal reconstruction. Thus, the
Ministry demanded that the Bank of Japan loosen monetary policy. The Bank of Japan
complied, unable to reject the Finance Ministry’s demand due to its lack of
independence from the Ministry. In February 1987, the Bank of Japan lowered the
official discount rate to 2.5% and kept it at that level until May 1989. This excessively
loose monetary policy drastically increased financial liquidity, stimulating a rapid
2
Yoshikawa 1999, 7-41.
3
Shiratsuka, Taguchi, and Mori 2000, 116-119.
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