Japanese Economy: The Burst of the Asset Bubble

Since the 1990s Japan has been in a deflationary spiral that has greatly impacted the country as a whole. This deflation that crippled the booming economy of the 1970s and 1980s is the result of many contributing factors, the greatest of which was the burst of the asset bubble. This happened in the early 1990s due to the uncontrolled credit supply and quickly growing asset prices. Recovery from the ensuing economic crash some economists claim still has not been accomplished. “In Japan, overall prices have not risen since the late 1990’s,” which is a very bad thing (Gruber). There have been multiple instances where the Bank of Japan has tried to correct this failure, but they had no success. Three of these attempted corrections were through the decrease of interest rates, quantitative easing, and an expansionary monetary policy. However, more recently there has been another recovery attempt through similar methods, in addition to an increased consumption tax rate.

The Japanese governments first attempt at stopping the deflationary spiral was through decreasing its interest rates. In 2000 the Bank of Japan initiated ZIRP, or Zero Interest Rate Policy. It was cancelled it later that year, but was reinstated a year later in 2001. This policy brought interest rates down to near 0% as an attempt to restart the economy. This restart was supposed to happen through the creation of more demand for goods and services, as well as increasing business investment (Jacobs). However, as we discussed in class dropping the interest rate to spur investment, consumption, and aggregate expenditures only works during normal times (Fairchild). This initiative alone proved to be not enough to get the economy started again. So in addition, Japan began pur...

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