CIAO DATE: 12/03

It Takes More than a Bubble to Become Japan

Abstract

Japan's extended economic stagnation since its stock market peaked on December 29, 1989, has prompted a series of investigations, recommendations, and self -examinations, both in Japan and abroad. For monetary policy, two aspects of the situation have attracted particular attention. One is the ability or inability of a central bank to successfully raise the price level and inflation expectations when the nominal interest rate is at zero and the banking system is reluctant to lend. The other is the appropriate response of a central bank to an asset price bubble: whether the central bank can or should try to "prick" such a bubble when it is expanding, and how the central bank should cope with the economic aftermath of such a bubble bursting. This paper will consider the latter set of issues as raised by the Japanese bubble.

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