Bolder economic policy could have addressed the persistent bouts of deflation in post-bubble Japan, write Gene Park, Saori N. Katada, Giacomo Chiozza, and Yoshiko Kojo in Taming Japans Deflation. Despite warnings from economists, intense political pressure, and well-articulated unconventional policy options to address this problem, Japans central bank, the Bank of Japan (BOJ), resisted taking the bold actions that the authors believe would have significantly helped.
With Prime Minister Abe Shinzos return to power, Japan finally shifted course at the start of 2013 with the launch of Abenomics—an economic agenda to reflate the economy—and Abes appointment of new leadership at the BOJ. As Taming Japans Deflation shows, the BOJs resistance to experimenting with bolder policy stemmed from entrenched policy ideas that were hostile to activist monetary policy. The authors explain how these policy ideas evolved over the course of the BOJs long history and gained dominance because of the closed nature of the broader policy network.
The explanatory power of policy ideas and networks suggests a basic inadequacy in the dominant framework for analysis ofthe politics of monetary policy derived from the literature on central bank independence. This approach privileges the interaction between political principals and their supposed agents, central bankers; but Taming Japans Deflation shows clearly that central bankers views, shaped by ideas and institutions, can be decisive in determining monetary policy. Through a combination of institutional analysis, quantitative empirical tests, in-depth case studies, and structured comparison of Japan with other countries, the authors show that, ultimately, the decision to adopt aggressive monetary policy depends largely on the bankers established policy ideas and policy network.
