Académique Documents
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1 Ito, T. and Mishkins, F.S. (2004) severely criticized the monetary policy and
dubbed its failure as the most likely cause of deflation in Japan (Ito, T. and
Mishkins, F.S. (2004). NBER Working Paper Series: Two Decades of Japanese
Monetary Policy And The Deflation Problem).
2 Baig, T. (2003). IMF Working Paper- Asia and Pacific Department:
Understanding the Costs of Deflation in the Japanese Context.
3 Hokkaido Takushoku, Long-Term Credit, Nippon Credit
As short-term interest rates hit zero, real interest rates remained positive 4
and conventional monetary policy based on pure manipulation of short-term
nominal interest rates does little to turn the tide (Bernanke, 2002) 5.
Remedies
The monetary policy is not limited to conventional tools to stimulate the
economy (S-T interest rate manipulation). Bernanke (Bernanke, 2002) argues
that the central bank either alone or in cooperation with other parts of the
government can further stimulate the economy by:
- Managing expectations which necessitates a credible central bank
- Expanding asset purchases and menu of buys: S-T and L-T bonds to
bring down L-T interest rates, equities, foreign-currency denominated
bonds, NPLs, etc.
- Extending loans to banks at low interest rates
- Imposing explicit ceilings on interest rates of L-T treasury debt
- Influencing yields on L-T privately issued securities through the
discount window (central bank lends to banks that in turn lend to
companies that issue securities)
- Cooperating with fiscal authorities that implement broad tax cuts or
increased government spending paired with open-market purchases to
avoid any interest rates hikes (stimulates consumption)
- Implementing structural economic and financial reforms
Note that Bernanke does not recommend manipulation of the foreign
exchange to fight deflation although it was done back in 1933-1934 by
Franklin Roosevelt when the dollar was 40% devalued against the gold.
Why It Took So Long
When S-T interest rates hit zero, the economy would be in need of nonconventional monetary policies to jump-start the economy.
The BoJ is often criticized as not being proactive enough or not having taken
preemptive measures to control neither the asset bubble nor the recession
that followed its burst: Bernanke and Gertler (2001)the central bank
waited too long before tightening monetary policy during the bubble period,
and delayed in easing once the economy headed downward (Baig, 2003).
Series of mistakes6:
- Slow structural reform in regulated sectors
Factor
Exchange Regime
Japan
Floating
Lebanon
Pegged to the $
Note
The Yen's appreciation during recession aggravated the situatio
Reactive
Conventional
Proactive
Conventional &
Non-conventional
Inflation-target
Private Debt
Negligible to nil
Central Bank
Newly
Independent
Low
credibility
Independent since
inception
High credibility
Sovereign Debt
Internal
Internal
Asset Bubble
Late 80s
None
High
Low
Monetary Policy
Demographic Conditions
Aging
population
Aging
population
The aging population lowers the natural rate of interest and exp
income growth. Lebanon should take note of that especially tha
2015-2020 is expected to have a negative growth of 0.71% acc
Population Prospects: The 2012 Revision and thereafter from 2
maximum rate of 0.67%.
Sources:
Shiratsuka, S. (2003). The asset price bubble in Japan in the
1980s: lessons for financial and macroeconomic stability.
Bernanke, B. (2002). Deflation: Making Sure It Doesnt Happen
Here. Washington, D.C., USA.
Okina, K., Shirakawa, M. and Shiratsuka, S. (2000). The Asset Price
Bubble and Monetary Policy:
Japans Experience in the Late 1980s and the Lessons.
The Economist (March 18, 2013). Once more with feeling.
Nishizaki, K., Sekine, T., Ueno, Y.
deflation in Japan.