Monetary and Economic Studies Vol.19, No. S-1 / February 2001

"The Role of Monetary Policy under Low Inflation: Deflationary Shocks and Policy Responses," Background Paper: The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons

Kunio Okina, Masaaki Shirakawa, Shigenori Shiratsuka

Since the latter half of the 1980s, Japan’s economy has experienced the emergence, expansion, and bursting of a bubble economy, characterized by a rapid rise in asset prices, the overheating of economic activity, and the expansion of money supply and credit. This paper examines the mechanism by which the bubble economy was generated and summarizes lessons a central bank should draw from the experience in order to prevent it from happening again. Specifically, by focusing on the intensified bullish expectations that played an important role behind the large fluctuations in asset prices and the economy, the process of the emergence, expansion, and bursting of the bubble is examined in relation to the monetary policy at the time. Based on this analysis, the paper discusses a framework for monetary policy conducive to achieving both price stability and financial system stability.

Keywords: Asset prices; Bubble; Intensified bullish expectations; Monetary policy; Sustained price stability; Financial stability; Forward-looking monetary policy

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2001 Bank of Japan All Rights Reserved.

Home Japanese Home