Response: What More Can the Bank of Japan Do?

First, Japan is not in a "great depression" nor has it experienced a rise in unemployment or decline in income, prices and money comparable to U.S. experience in 1929-33 or, for that matter Japan's experience at that time. Declines in stock prices, land and housing prices have drastically reduced household wealth in Japan, and commercial banks' loan losses exceed losses in the United States during the great depression, but the similarity ends there. Second, we agree that Japan is not in a "liquidity trap" where monetary policy is powerless to affect prices, output, or other key variables. Wages and product prices have fallen. Land and housing prices continue to decline, and the yen-dollar exchange has appreciated from 145 in June 1998 to about 104 as I write. None of this experience seems consistent with a liquidity trap. A more likely explanation is that the fall in prices and the appreciation of the yen reflect an excess demand for money.