Endnotes

¹The Euro area includes 16 countries: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

²The nominal value of the yen appreciated by 17% against the US dollar and by 27% against the euro, from September 2008 to January 2009.

³US imports, on a customs basis, declined by more than 30% from July to December 2008; the import of transportation equipment showed an even sharper decline of about 40%.

⁴In contrast the share of exports to the US and Europe declined precipitously from 55% to 35% over the same period.

⁵When the yen began to appreciate sharply following the Plaza Accord, there was a contraction of manufacturing activity. The Japanese policymakers reacted by expanding both fiscal and monetary policies. Coupled with the favorable terms of trade changes (caused by a fall in energy and commodity prices) at the time, these policy actions allowed economic growth to pick up from the fall of 1987 but subsequently led to the emergence of a bubble economy, with sharp rises in stock, real estate and other asset prices. Monetary policy then was reversed.

With a bursting of the bubble economy in 1991, the Japanese economy decelerated and, in 1992, entered a prolonged period of stagnation. Annual growth over the next decade averaged less than 1% , compared with over 4% during the previous decade. Growth appeared to pick up in 1995-1996, only to fall back. In 1998, in the midst of a systemic banking crisis, a severe recession set in and the economy contracted in 1998 and 1999. The stagnation was compounded by sustained deflationary pressure; annual Consumer Price Index inflation averaged less than 1% over the “lost decade.” Although annual economic growth finally exceeded 2% in 2003 and 2004, this moderate recovery did not end the deflation. The corporate goods price level was 13 % lower in 2003 than in 1991.

During the prolonged period of stagnation, the authorities eased both fiscal and monetary policies substantially to support domestic demand and to fend off deflationary pressure. The general government balance, which was in small surpluses in the early 1990s, deteriorated sharply; it has been in deficit every year since 1993—with deficits exceeding 7% of GDP in virtually every year from 1999 to 2003. As a result, the balance of gross public debt rose from about 70% of GDP in the early 1990s to over 180% in 2005. As to monetary policy, the BOJ lowered the discount rate in several steps from 4.5% in December 1991 to 0.5% in September 1995. With no additional room left to maneuver, in February 1999, it reduced the overnight call rate to virtually zero, a policy it continued to follow until March 2006, except for the brief period of August 2000–March 2001. A new framework of “quantitative easing”—with the de facto “zero” policy rate—was adopted in March 2001.

⁶Takagi and Kozuru (2009) used the same methodology and data set to analyze the macroeconomic interdependence of Asia.

⁷The sample countries include: (i) for Asia, in addition to Japan; PRC; Hong Kong, China; India; Indonesia; Korea; Malaysia, Philippines; Singapore; Taipei,China; and Thailand; and (ii) for the rest of the world, Belgium, France, Germany, Italy, the Netherlands, Spain, the US, and the United Kingdom. Global and regional GDPs (or prices) are the weighted averages of the individual country GDPs (or prices) in the respective regions, with 2000 US$-GDPs used as the weights. The underlying data comes from the IMF, International Financial Statistics online database; for Taipei,China only, the central bank of Taipei,China, Financial Statistics Monthly, monthly issues.

⁸German industrial production did not decline noticeably during the last quarter of 2008; even during the first quarter of 2009, the decline was around 20% from a year earlier—significantly less than Japan's decline(IMF, International Financial Statistics online database).

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