Japan’s Lost Decade: Escaping Liquidity Trap and Preventing Deflation

was a period of prolonged economic recession in which deflation and liquidity trap plagued the economy. The Bank of Japan’s (BOJ) inability to apply significant expansionary monetary policy has been the primary focus for scholarly debate. Most scholars agree that the BOJ retained significant powers which although unconventional are necessary in times of financial crisis. The current importance of understanding the Japanese experience throughout the 1990s is paramount to understanding current justifications for the United States ’ (US) expansionary monetary policy. Therefore, this paper will explore the problems facing policy-makers in Japan throughout the “Lost Decade, ” the schol-arly debate focused on policy options for the BOJ, what US policy-makers have taken from Japan’s Lost Decade, and how those policy-makers applied that acquired knowledge. The “Lost Decade ” has provided insight into the prevention of deflation and the escape from liquidity trap.1 In particular, the failure of the Bank of Japan (BOJ) to respond quickly and effectively to the prob-lems facing the Japanese economy and the inability of the Japanese legislature, the Diet, to pass comprehensive expansionary policy when confronted with significant debt, contributed significantly to an environment of uncertainty, the result a phenom-enon called the Ricardian equivalence, and stagnation.