Lessons from Japan's Experiences in Monetary Policy (Summary *1)
-- Remarks by Kunio Matsuda, Chief Representative in Frankfurt, Bank of Japan, at the University of Wuerzburg in Germany on February 7, 2001 --
- *1 For the full text (available only in German), click here.
The bubble economy in Japan was not new and is not old even now. We should not describe Japan's nineties simply as a "lost decade," without drawing precious lessons from its experiences.
We should note that 1) bubbles appear in rather favorable economic and price conditions, 2) what is later recognized as bubbles first looks reasonable under seeming paradigm change, and 3) excessive pride, optimism, and consideration of the international background as well as foreign exchange rates render central banks hesitant to tackle the bubble timely and decisively.
I cannot exclude the possibility of bubble-like phenomena looking at not only the exuberance in the Nasdaq market, which draws support from "new economy" concepts, but also the acceleration of asset prices in some euro area countries. Under the unified monetary policy in the euro area, more intensive dialogue between the governments and the national central banks is of utmost importance.
Other implications from the bubble in Japan may be, 1) the difficulty in interpreting the acceleration of the money growth against the backdrop of innovation and structural changes, and its influence on asset prices, and 2) the necessity of the modernization of the bank supervisory framework and due consideration of micro prudence information in the conduct of monetary policy.
The so-called "zero interest rate policy" is another special but important monetary policy experience in Japan. Zero interest rate policy has obviously contributed to avoiding the deflationary spiral. However, the Bank of Japan and the Japanese government have not yet succeeded to bring the Japanese economy on a sustainable recovery track, in spite of the extreme monetary and fiscal packages. It means that the problem to be solved lies in the private sector.
Based on these experiences, the Bank of Japan published its analysis on price stability and economic forecasts last October. These have increased the transparency of monetary policy. On the other hand, the Bank has not agreed to adopt inflation targeting because of the uncertainty of its effectiveness. In these two respects, the ECB shares the same experiences.
Foreign exchange policy is an important issue for central banking today. Different from the situation in Japan, the ECB is solely responsible for foreign exchange interventions in the euro area. There might arise a case in which the ECB is expected to intervene in order to "weaken" the euro but its consequences would contradict its primary objective, i.e., price stability.