The Japanese Economy and Economic Policy in Light of the East Asian Financial Crisis

Author: 
Ramkishen S. Rajan
JEL codes: 
G01
Description: 
IPS Working Paper No. 2
Abstract: 

The depth and breadth of the East Asian financial crisis has
added a sense of acute urgency for some concrete and credible
measures by policy-makers to revitalise the Japanese economy.
While steps to be taken for the long-run competitiveness and
economic revitalisation of the Japanese economy are clear (with the
only doubt being about whether and how effectively they will be
implemented), those needed to boost aggregate demand in the shortrun
are far less obvious. Given the near-zero nominal interest rates in
Japan, most observers argue that an expansionary monetary policy
would be ineffective. However, as with Krugman (1998a,b), we argue
that once a distinction is made between real and nominal interest
rates, it is logically possible for monetary policy to be effective in
raising demand if it is able to create inflationary expectations. This
could probably be effected through explicit announcements by the
Bank of Japan of the intention to target a certain inflation rate in the
future.