Tuesday, July 5, 2011

Can Bernanke Learn from Japan and Greenspan?

On May 27, 2000, a Member of the Policy Board, Bank of Japan, Eiko Shinotsuka, spoke on the subject “Japan’s Economy and the Role of the Bank of Japan.”  His main focus was the lost decade of the 1990s.

In his view, two factors were critical: (1) the bursting of the land and stock market bubbles, and (2) a structural problem.

Euphoria and loss of self-control, coupled with the Bank of Japan providing easy money for a long time, resulted in unfounded bullish expectations.  Capital invested in assets at the peak was devalued when the bubble burst (luxury resort hotels on remote islands).  The resulting fall in asset prices impaired the asset quality of both borrowers and lenders.

The structural problem was a decline in the average productivity of capital.  Wage growth exceeded labor productivity growth during the bubble, squeezing profits.  The structural problem exacerbated the impact of the bursting of the bubble.

Going forward, his recommendation was that the Bank of Japan needs to pay attention to rising asset prices, to be prepared to conduct pre-emptive monetary policy to prevent another bubble, and increase its awareness of this risk scenario.  Easy money for too long is playing with fire.

Will Bernanke learn from Japan and Greenspan?

3 comments :

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This would mean Bernanke could learn from anyone. Structural problem`s are the toughest to moderate. Rising asset prices are to tough to accuratly read and are always flawed. WE shall see.
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