Blaming the Japanese financial crisis on the BOJ interest rate policy is rather lazy analysis. It ignores the deregulation underway in the 1980s (pushed on it by the US) and the build up of private debt. BOJ window guidance was either relaxed or became ineffective in the deregulated environment—depending on who you ask. Credit was driving up asset prices—especially real estate—because banks were making loans hand over fist. Banks went bad because they were increasingly making bad loans both domestically and abroad, not merely because the BOJ tightened credit conditions. That was apparent to the market before the rate hikes. If you look at the change in total credit to the private sector from BIS for that period, it was declining well before BOJ increased rates. So the asset bubble was already bursting as credit pulled back. It’s correct to argue the BOJ misstepped by increasing the rate when it should have done the opposite, which it had to do anyway, but it wasn’t the approximate cause of the crisis itself. It was a Minskyan crisis just like the GFC.

“Lost decades” were due to missteps in fiscal policy by raising taxes—much like the US in 2011 after the GFC but by cutting fiscal support.

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At some point I will write up a post about the Japanese asset bubble, but I had to keep things brief here to keep the blog post on topic. I generally agree with your analysis, with a few caveats.

The first is the plaza accords - in addition to pushing for financial deregulation, the US pushed for Japan to cut rates several times after in order to stop the appreciation of the yen. The US essentially shifted from wanting the yen to appreciate in 1985 to wanting it to depreciate in 1987, and pushed Japan into enacting contractionary and then expansionary monetary policy to manage exchange rates instead of focusing on the domestic Japanese economy.

The second is that rate hikes were extremely important - Bank of Japan raised rates from 2.5% in May 1989 to 6% in August 1990. It took until 1993 for them to cut rates back down to 2.5%! This despite GDP growth decreasing every year from 1990-1993 and constrained lending attitudes by banks. The purpose of monetary policy is to maintain nominal labor income growth across time, and rapidly tightening monetary policy had the predictable result of decreasing growth.

I agree that the consumption tax implementation represented unwelcome contractionary fiscal policy and that the bubble itself represented a Minskyan crisis. But I disagree that either of those necessitated the contraction in the real economy that Japan experienced. Without bad monetary policy, the crisis would have been closer to Black Monday or the dot-com bubble than the Great Recession. Either way, the purpose of government control of monetary and fiscal policy is to ensure the highest possible rate of stable economic growth, something Bank of Japan and the Japanese government actively worked against with tight policy around 1990.

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