ABSTRACT
Backed by some monetarist economists, many in the LDP and MOF insist that this is exactly the cure and are pressuring the BOJ to go along. Backed by other economists and some influential figures within METI, the BOJ denies that there are any monetary magic bullets. If it were possible for monetary stimulus alone to revive growth, it would have done so long ago. In a healthy economy, low rates induce companies to buy more machinery and consumers to buy more cars and houses. In 2002, the BOJ pushed the proverbial string even harder, expanding the monetary base at a virtually unprecedented 20-30 percent annual rate. Deflation is a dragon that breathes little fire. Yes, Japan has some deflation—that is, a slow decline in prices—but there is no “deflationary spiral.”. Japan’s recent deflation is primarily a symptom of a weak economy, one where actual GDP is now 5 percent or so below full capacity.
