Lessons from Japan's prolonged Recession

Abstract

Japan’s economy experienced prolonged recession which had never been observed before. This paper focus on the events in Japan’s economy since 1985, tracing how the asset prices inflated and collapsed, and how the Bank of Japan responded to the deteriorating economy. We will learn from the Japan’s experience that it becomes more difficult for monetary policy to reactivate the economy, once it falls into the deflation. We will conclude that the BOJ should not have ignored the role of money stock by showing the statistical evidence of the relationship between money stock and the economic activity.

Keywords: bubble, deflation, money stock, financial anxiety.