Japanese Monetary Policy: A Case of Self-Induced Paralysis?

Abstract

The Japanese economy continues in a deep slump. The short-range Inter- national Monetary Fund (IMF) forecast was that, as of the last quarter of 1999, Japanese real gross domestic product (GDP) would be 4.6 percent below its potential. This number is itself a mild improvement over a year earlier, when the IMF estimated Japanese GDP at 5.6 percent below potential. A case can be made, however, that these figures significantly underestimate the output losses created by the protracted slowdown. From the beginning of the 1980s through the fourth quarter of 1991 (hereaf- ter abbreviated 1991Q4, etc.), a period during which Japanese real eco- nomic growth had already declined markedly from the heady days of the 1960s and 1970s, real GDP in Japan grew by nearly 3.8 percent a year. In contrast, from 1991Q4 through 1999Q4, the rate of growth of real GDP was less than 0.9 percent a year. If growth during the 1991-99 period had been an even 2.5 percent a year, Japanese real GDP in 1999 would have been 13.6 percent higher than the value actually attained.