It Takes More than a Bubble to Become Japan

Working Paper
03-9
October 2003

While asset price booms and even busts are not uncommon, Japan's Great Recession is. Monetary policy clearly was, and remains, a contributing factor to Japan's stagnation, but it was not Japan's asset price bubble nor its bursting that produced this outcome. Negative developments in the Japanese economy after the bubble were driven, not by the fall in asset values, but rather by other problems in the Japanese economy, including overly tight monetary policy itself. Comparative analysis of other recent asset price booms and of parallel US developments indicates that a primary concern for monetary policy should be how to encourage restructuring in the aftermath of a boom, not the boom itself.