Japanese Macroeconomic Policy Management after the Global Financial Crisis

Introduction

The financial crisis that started in 2007/08 triggered an unprecedented deterioration of the global economic condition. Japan, along with other East Asian countries, was relatively far from the ground zero of the initial financial crisis triggered by the subprime loan problem in the United States. Japanese economy was relatively unharmed until the last quarter of 2008. Then, suddenly, a significant decline of foreign demand and the sharp appreciation of yen's exchange rate hit the country, which had become so dependent to export through 2000s. Japanese economy suddenly stepped the breaks in the fourth quarter of 2008 and the first quarter of 2009, resulting in averaging negative GDP growth less -10.0% in annual rate for this six month period. Responding to the global economic crisis, major countries lowered interest rates and took fiscal measures, as well as microeconomic policy responses to preserve their financial systems and financial institutions. In this paper, instead of directly describing Japan's macroeconomic policies, I compare Japan's economic conditions and its policy responses with those in European countries and in the United States. I believe this strategy is more effective for two reasons: First, developed countries are facing more or less similar problem --- deteriorating fiscal condition and zero interest rate bound are common limits to their monetary and fiscal policies. Comparison of with other developed countries facing the similar difficulties will help to illustrate the characteristics of Japan's problems and corresponding policy responses as well as potential policy alternatives. Second, I believe it is imperative to understand countries political climates and basic philosophies toward economic policies, to understand different conducts of macro economic responses. Making comparison with other countries is the easiest way to do this. In the following, first, I review macro policy responses of the United States and of European countries, emphasizing the contrast between aggressive US policy stance and conservative European policy responses. Then, I discuss Japanese macroeconomic problems after the global financial crisis: short-run fiscal policy responses, long-run fiscal problem, and monetary policy at near zero-interest rate bound.

The United States

Barack Obama's inauguration as the President of United States in 2009 parallels Franklin Roosevelt's in 1933 in many ways, including in terms of America's macro economic policy management. Both Obama and Roosevelt are democrat presidents succeeding republican presidents, namely Bush and Hoover. Change in the political climate explains why US fiscal expansion after the global financial crisis has been so aggressive. However, to understand US response in monetary and financial policy, focusing on continuity and tradition are much important. The Great Depression in 1930s is such a huge landmark in US economic history so that it still has such large influences on academics and policy maker in 21st century. While there is a sharp rivalry on the effectiveness of fiscal policy, the consensus on monetary policy seems to be solid and profound. Friedman and Schwartz's A Monetary History of the United States, 1867-1960 is the milestone of the economic analysis of the Great Depression. In their book, Friedman and Schwartz emphasized the death of NY FED chairman, Benjamin Strong, and resulting lack of strong leadership within the Federal Reserve System facing the financial panics in early 1930s as the main causes of the Great Depression. While many people disagrees with Friedman and Schwartz about the importance of NY FED chairman's death, there is a wide and solid consensus about their main point that the failure of FED's monetary policy was the biggest cause of prolonged depression in the United States in interwar period download