Monetary Policy Beyond the Zero Interest Rate Policy under Deflation

Ito, Takatoshi

The economic growth rate has been quite low during the 1990s. General prices and
wages have been declining since the late 1990s, and deflation seems to have set in.
Although the nominal interest rate has been zero for the last few years, that has failed to
stimulate investment and consumption. Several fiscal stimulus packages—discretionary
public expenditures and tax cuts—have been employed, but they too failed to stimulate
private-sector investment and consumption. Due to deficit spending and declining tax
revenues, the government debt-GDP ratio has risen from 60% in the beginning of the 1990s
to 140% in 2002. According to the Moody’s, the Japanese government bonds are now rated
below the Botswana counterpart. With apparent ineffectiveness of monetary and fiscal
policy, the Japanese economy is drifting downward. The size of the nominal GDP has
shrunk by 5% between 1997 and 2003.

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More About This Work

Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 236
Published Here
February 14, 2011