Macroeconomic Adjustment to the Lehman Shock in Japan

Abstract

In this paper we overview the macroeconomic adjustment to the Lehman shock in Japan. After retrospecting the Japanese economy since the Plaza Accord which led Japan to the bubble economy and the ‘lost decade’ we explain the business cycles in Japan and show related macroeconomic indicators since as early as the 1980s. Then we trace the macroeconomic responses of the Japanese economy to the Lehman shock by selectively looking at such aspects as the contribution of GDP growth by expenditure components, from peak to trough of the CI(composite index), production and inventory adjustment, and employment adjustment. We also supplement our analyses by observing additional factors including export, investment, consumption, exchange rate, and the stock market. The roles played by policy measures and expectations formation are also emphasized to explain why and how the Japanese economy did not develop as forecasted against the ‘once in a hundred years’ crisis.