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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