Before you start
What you'll be able to answer
- How did the Bank of Japan change its interest rate from 1990 to 1995, and why?
- What were the government's spending packages of 1992 to 1995?
- What happened to the budget deficit, the gap between spending and revenue, and to public debt?
Where this sits
Japan's Lost Decade — 1989 to 2006 · this module is lit
- Dec 1989Share prices in Japan peak
- Aug 1990The Bank of Japan's last rise in its discount rate, the interest rate at which it lent to banks
- Aug 1992The government announces the first of six spending packages up to 1995
- 1995-96The first direct use of taxpayers' money against financial instability covers losses at failed housing-loan companies, the jusen
- 1 Apr 1997The consumption tax rate, a tax on what people buy, is raised
- Nov 1997Sanyo Securities, Hokkaido Takushoku Bank and Yamaichi Securities fail
- Oct-Dec 1998Japan's parliament, the Diet, makes more public money available to deal with banks' bad loans, and the state takes over the Long-Term Credit Bank and Nippon Credit Bank
- Feb 1999The Bank of Japan begins its zero interest rate policy, pushing its overnight rate as low as possible
- Mar 1999Public capital, new capital paid for by the state, is put into the major banks
- Mar 2001The Bank of Japan begins quantitative easing, a target for the money banks keep in their accounts with it
- Oct 2002The Financial Services Agency, the banking regulator, launches its programme to cut bad loans
- Mar 2006The Bank of Japan ends quantitative easing
The Bank of Japan in August 1990
In August 1990 the Bank of Japan, Japan's central bank, raised its discount rate, the interest rate at which it lent to banks, to 6 per cent. It was the fifth rise in all, the first having come in May 1989. Share prices had been falling since the start of the year, but land prices were still rising, and the Bank was trying to slow the economy. Within a year the picture had changed: growth was falling, inflation, the general rise in prices, was easing, and land prices were falling.
Within a year growth, inflation and land prices had all turned down. What did the Bank of Japan do with its rate between then and the end of 1995?
It cut in a series of steps from the summer of 1991, with a pause along the way, and by the autumn of 1995 the rate was below 1 per cent. Each cut made it cheaper for banks to borrow. The cuts began in 1991, a year before the first spending package, so the Bank did not wait for one.
The Bank of Japan began cutting its rate in 1991
In the summer of 1991 the Bank of Japan began to cut its discount rate. Growth had slowed, inflation was easing and land prices were falling, according to staff at the Federal Reserve, the US central bank.
A rate cut works through borrowing. A lower discount rate makes it cheaper for banks to borrow from the Bank of Japan. Other short-term rates follow it down, among them the call rate, the rate banks charge each other for one-day loans. Banks can then lend more cheaply to firms and households. Cheaper loans help pay for machines, buildings and homes, and that spending supports output and jobs.
Set between banks, the call rate need not match the discount rate. It started higher: above 8 per cent in 1991, the International Monetary Fund (IMF) reported. Over the next four years it fell by almost 8 percentage points, Bank of Japan economists later wrote.
The rate came down in steps over four years
The chart shows the discount rate each month from 1989 to 1995. From its peak the Bank cut the rate nine times. By September 1993 it was down to 1.75 per cent, and there it stayed through 1994.
As late as 1995, Federal Reserve staff noted, policymakers and forecasters had not seen how serious Japan's situation was, and financial markets did not expect further cuts. Cutting nevertheless resumed in 1995: the rate went to 1 per cent in April and to 0.5 per cent in September. In the four years from July 1991 to September 1995 the Bank had taken 5.5 percentage points off its discount rate.
Source: IMF, Monetary and Financial Statistics (MFS_IR), discount rate, Japan. IMF data, used with credit.