The Morning After: Explaining the Slowdown in Japanese Growth in the 1990's

IMF Working Papers, January 1, 1999

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The Morning After: Explaining the Slowdown in Japanese Growth in the 1990's

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Bibliographic details

• Authors: Tamim Bayoumi
• Published: January 1, 1999
• Series: IMF Working Papers

Summary

• This paper uses vector autoregressions (VARs) to investigate four explanations of the extended slump in Japanese economic activity during the 1990s:
  • the absence of bold and consistent fiscal stimulus;
  • limited room for expansionary monetary policy because of a liquidity trap;
  • asset price deflation reflecting the long-term problems caused by overinvestment, inadequate returns on saving, and debt overhang;
  • disruption of financial intermediation.
• The results indicate that disruption in financial intermediation, largely operating through the impact of changes in domestic asset prices on bank lending, has been the principal case of the slump.

Methodology

• Empirical approach: vector autoregressions (VARs).
• Focus: disentangle the relative importance of four candidate explanations for Japan’s 1990s slump by tracing dynamic responses in macroeconomic variables to shocks consistent with each explanation.

Key findings

• Principal cause identified:
  • Disruption in financial intermediation was the main driver of the extended slump.
  • The disruption operated largely through the impact of changes in domestic asset prices on bank lending.
• Other explanations investigated included:
  • Absence of bold and consistent fiscal stimulus.
  • Limited room for expansionary monetary policy due to a liquidity trap.
  • Asset price deflation tied to overinvestment, inadequate returns on saving, and debt overhang.

Policy implications (as implied by findings)

• Addressing disruptions in financial intermediation and restoring the link between asset prices and bank lending are central to resolving prolonged slumps similar to Japan’s 1990s experience.
• The relative ineffectiveness of monetary policy in a liquidity trap and the role of fiscal stimulus are important considerations but were not identified as the principal cause in this analysis.

Subject areas and keywords

• Subject: Asset prices, Bank credit, Expenditure, Financial services, Land prices, Money, Prices, Real interest rates
• Keywords: Asia and Pacific, asset, asset deflation, asset price change, asset price effect, Asset prices, Bank credit, Economic slump, Exogenizing land price, financial intermediation, fiscal policy, household assets, innovations in asset price, Land prices, lending, lending constraint, levels terms, rate of return, Real interest rates, share price, slump, stimulus package, tax hike, WP

Content in this bundle

• The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s - WP/99/13
  • The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s - WP/99/13 (Markdown version)
  • The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s - WP/99/13 (PDF)