Taming Japan's Deflation: The Debate over Unconventional Monetary Policy by Gene Park et al.

Abstract

Reviewed by: Taming Japan's Deflation: The Debate over Unconventional Monetary Policy by Gene Park et al. Jenny Corbett (bio) Taming Japan's Deflation: The Debate over Unconventional Monetary Policy. By Gene Park, Saori N. Katada, Giacomo Chiozza, and Yoshiko Kojo. Cornell University Press, Ithaca NY, 2018. xviii, 243 pages. $45.00, cloth; $21.99, E-book. Since at least 2008 when the Lehman shock ushered in the Great Financial Crisis (GFC), economists, politicians, and journalists have publicly and privately worried that the large economies of the world might be turning Japanese. "Japanification" brings the specter of stagnant growth, price deflation, huge public debt, and an economy that apparently does not respond to policy remedies. This has brought about new interest in understanding the sources of Japan's problems, how and why Japan's economy may be different from others, and, importantly for this book, why policy has "failed." The interest [End Page 153] has not waned since the onset of Abenomics and indeed has been renewed in light of Japan's economic policy response to COVID-19. The book remains timely even though the analysis ends in early 2018. Park and his coauthors note that Japan's experience has become a cautionary tale about how difficult it is to end deflation (p. 25). They set out to inquire whether Japan has even really tried. "The puzzle motivating this project is why the BOJ [Bank of Japan] was reluctant to embrace unconventional monetary policy even after Japan had experienced deflationary spells for a longer time than other industrialized democracies" (p. 17). The nonspecialist might quail at the prospect of a whole book on monetary policy, but there are many reasons to persevere with this one. To begin with, it is well written and not heavily technical. It contains a wealth of stories about policy process and the individuals involved that will fascinate anyone interested in the politics and mechanics of economic policy in postwar Japan. Clearly the authors had exceptional access to key players and they make good use of their insight and hindsight. Beyond description, the book also attempts an ambitious application of the study of ideas to understanding the formulation of monetary policy. Crossing disciplinary boundaries, the authors describe the development of a closed policy network that incubates a fixed ideational approach and they give evidence of the impact of those ideas on policy outcomes. Their central argument is that the Bank of Japan remained closed to outside ideas about monetary policy and persisted with a "BOJ view" until Abe Shinzō disrupted the model by imposing a governor with a different world view (incidentally challenging the limits of central bank independence). Chapter 2 sets the scene for the rest of the book. It explains the monetary policy options for fighting deflation in a way that nonspecialists can follow and then describes the BOJ's early experiments with "unconventional" monetary policy, in 1998 and again from 2001 to 2006, against the background of economic conditions at the time. The bulk of the chapter focuses on the global financial crisis of 2008–9 and puts BOJ policy in the international context, comparing it to the U.S. Federal Reserve Board and the European Central Bank. The authors argue that although the BOJ looked like an early experimenter at the turn of the twenty-first century, its efforts were reluctant and tentative in the first rounds and late and tepid in the bigger crisis of the GFC, until Abe's intervention. Furthermore, the BOJ remained wedded to more conventional policies even though Japan faced circumstances arguably more challenging than other countries and thus had even greater need for bold action. Implicit in the argument is the conviction that unconventional policies would have been the correct ones for Japan at the time—an issue I return to below. The book cites the impressive and well-known roll call of international economists who urged bolder reflationary policy for Japan at the [End Page 154] time and the large academic literature explaining the case in theory (noted in footnotes throughout the book). In the face of that pressure, the bank offered several arguments against unconventional policy. These are described but given rather short shrift...