Japan's Financial Crisis And Its Parallels To U.S. Experience (Special Reports (Institute For International Economics (U.S.)), 13.)

Japan is only one of many industrialized economies to suffer a financial crisis in the last fifteen years, but it has suffered the most from its crisis - as measured in lost output and investment opportunities, and in the direct costs of clean-up. Comparing the response of Japanese policy in the 1990s to that of U.S. monetary and financial policy to the American Savings and Loan Crisis of the late 1980s sheds light on the reasons for this outcome. This volume was created by bringing together several leading academics from the United States and Japan - plus former senior policymakers from both countries - to discuss the challenges to Japanese financial and monetary policy in the 1990s. The papers address in turn both the monetary and financial aspects of the crisis, and the discussants bring together broad themes across the two countries' experiences.

As the papers in this Special Report demonstrate, while the Japanese government's policy response to its banking crisis in the 1990s was slow in comparison to that of the United States government a decade earlier, the underlying dynamics were similar. A combination of mismanaged partial deregulation and regulatory forebearance gave rise to the crisis and allowed it to deepen, and only the closure of some banks and injection of new capital into others began the resolution. The Bank of Japan's monetary policy from the late 1980s onwards, however, was increasingly out of step with U.S. or other developed country norms. In particular, the Bank of Japan's limited response to deflation after being granted independence in 1998 stands out as a dangerous and unusual stance.

Reviews:

Recently, Adam Posen (an influential US monetary economist)has written some really good stuff on Japan's economic problems. It was his name on the cover that persuaded me to buy this book. If you want a rich and in depth - in some parts academic - account of why Japan is struggling then this is for you. There are four themes...1) the origin of Japan's banking problems 2)comparisons of Japan's banking problems and the US S&L crisis 3) political problems faced by those who wish to see the BOJ adopting very loose money and 4) how the BOJ's monetary policy can be adapted to these exceptional circumstances and used to promote a sustainable recovery. If you read this and Posen's previous books on Japan you'll be well equipped to understand what is wrong with the world's second largest economy. The only weak area is the treatment of fiscal matters. Those are largely ignored, even though fears of government bankrupcty weigh heavily on the financial markets.