Japanese Monetary Policy: A Quantity Theory Perspective

Abstract

I n the last half century, Japan has exercised an enormously beneficial in-fluence on the world. After the end of World War II, it not only adopteddemocracy, but it also showed that non-Western countries could combine democracy with attainment of Western living standards. By embracing the use of Western technology and combining it with thrift and hard work, Japan mod-ernized its economy and grew at double-digit rates for two decades in the 1950s and 1960s. By the early 1970s, Japan took advantage of economies of scale in manu-facturing and exported automobiles, steel, ships, and other manufactured goods to the world. By the early 1980s, it aggressively adopted new technology to create a range of electronic consumer goods for export, such as cameras and VCRs. At that point, Japan had also moved beyond importing innovative tech-nology from the West to exporting its own innovations, such as just-in-time manufacturing techniques. More important, the range and quality of goods offered by Japanese firms forced Western companies to remain dynamic and competitive. Over the post–World War II period, Japan has implemented a variety of monetary regimes. The world can learn valuable economic lessons from Japan by studying its monetary history. Japanese monetary policy divides naturally into two time periods separated by 1987. The first part includes the high infla-tion of the early 1970s and the establishment of price stability by the mid-1980s. The second part includes the boom-bust episode known as the bubble.1 [email protected]. The author benefited from early discussions with Milton Fried-man and Allen Meltzer. He especially benefited from the friendly fire of colleagues—Michael Dotsey, Roy Webb, and John Weinberg. The views in this article are solely those of the author and should not be attributed to the Federal Reserve Bank of Richmond, the Federal Reserve System, or any other individuals. 1 This article uses a quantity theory framework. “A Quantity Theory Framework for Under-standing Monetary Policy, ” available upon request from the author, explains this framework