Japan’s economic ordeal since the bursting of asset bubble three decades ago is explained by the home-grown financial crisis of the 1990s and the subsequent deflation that lasted over an extended period, compounded by the demography where production age population declines at a faster speed than the entire population. These issues are worth revisiting because they were initially thought to be of Japan’s idiosyncratic nature but later acknowledged to be common set of challenges for the rest of the world.
The lecture will focus on the role played by the central bank to address the unprecedented financial crisis of the 1990s, which in retrospect was driven my similar dynamics that led to the Global Financial Crisis a decade after. Special focus will be on the so-called lender of last resort function performed by the central banks. There will be two case studies in the context of Japan’s financial crisis. One would be the “Dark November” of 1997, when four financial institutions, including internationally active ones, went under in a single month. The other case features the failure of Long Term Credit Bank of Japan which had a large book of cross-border derivative transaction and thus involved international dimensions. The lecture will assess successes and failures of crisis management by the Japanese authorities and elaborate on how their experiences were translated into a major overhaul of Japan’s safety net arrangements.
Analysis of Japan’s experience of the home-grown financial crisis will be followed by an in-depth exploration of issues related to the Global Financial Crisis that involved the fall of Lehman Brothers. The creation of the dollar swap lines by the major central banks and the role it played in mitigating the financial crisis will be given a special focus as it added new dimensions to the traditional notion of the central banks’ lender of last resort function. A post-mortem analysis of the crisis will check in what way the regulatory and supervisory frameworks have been restructured to make the global financial system more resilient. To serve this purpose, a lecturer form outside, possibly a senior central bank official actually involved in the negotiations at the Basel Committee on Banking Supervision, will be invited to give an overview.
The lecture will then cover, after recognizing how the two objectives of the central bank to meet financial stability add price stability are interlinked, the evolution of the monetary policy. Among various unconventional policies invented by the Bank of Japan after facing the zero lower bound, features of Quantitative and Qualitative Easing (QQE), Negative Interest Policy and Yield Curve Control will be analyzed. Special attention will be paid to the efforts by the technocrats of the Bank of Japan to overcome policy challenges by improving the policy framework.
Finally, achievement by the aggressive monetary accommodation and its limits are explored to find out what alternative policies are required to bring Japan’s economy back on track to sustained growth. In this context, focus will be on the policies to elevate Japan’s potential growth rates and measures to restore sustainable fiscal structure.