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Monetary Policy Case Study

Case Title:

Deflation in Japan

Publication Year : 2004

Authors: Abhijit Sahay, T Phani Madhav

Industry: General Business


Case Code: MOP0005

Teaching Note: Available

Structured Assignment: Available

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After the end of the Second World War, Japan began to rebuild its economy. It embarked on a journey of rapid industrialisation with the support of its financial institutions, which became the drivers of its growth. Japan gave birth to the concept of 'just-in-time inventory' and other concepts, which have become the pillars of various corporations around the world. At one point in time it seemed that the Japanese economy would surpass that of America and emerge as the economic giant of the world. But after a satisfactory journey of almost three decades, today the Japanese economy is an economy in distress and is officially confirmed to be suffering from deflation, the main culprit that gave us the 'Great Depression'.

Pedagogical Objectives:

  • To discuss how the Japanese economy was rebuilt after the end of the Second World War with the help of a highly regulated financial sector
  • To discuss the events that led to the gradual deregulation of the financial sector and how the country’s economy transformed into a 'bubble economy'
  • To discuss the bubble that burst in 1991, the collapse of the financial institutions, the policy measures adopted by the Bank of Japan and the subsequent governments and their relevance to the most talked about problem faced by the country – deflation.

Keywords : Economic Crisis Case Study, Deflation, Liquidity trap, Regulated financial sector, Maastricht criterion, Bubble economy, Asset price bubble, Nikkei, Bank of Japan, Banking crisis, Zaibatsus, Keiretsu

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