Mr. Bernanke urged Japan to commit to keeping interest rates low until it got more inflation, and he defended novel ideas like buying government bonds with the understanding that fiscal policy makers would use the money thus raised to finance tax cuts to boost consumer demand.
The analogy between the U.S. economy and Japan's isn't perfect. Japan has an older population, less-profitable banks that didn't get quick capital or attention from regulators after the property bust, low job-market turnover and many industries shielded from international competition.
Other differences: Japan is a big exporter, while the U.S. is a big net importer; Japan wasn't a big debtor to the rest of the world, as is the U.S.; and Japan has a high savings rate, so its deficits have been funded internally. While Japan has experienced many years of deflation, the U.S. hasn't had any in the modern era.
But the similarities between the two economies are striking. Both countries went through stock and real-estate busts that severely damaged financial systems, Japan in the early 1990s and the U.S. in 2007 and 2008. Both saw unemployment rise and developed much slack in their economies.
Both ran up large budget deficits and pushed interest rates to zero. Both have important globally traded currencies that didn't dramatically weaken after their bubbles burst. That meant their exports didn't soar, as happened in some smaller economies after financial crises.
Mr. Bernanke's first significant brush with Japanese officials was in 1999. Consumer prices had started falling, and the Bank of Japan had already pushed short-term interest rates to near-zero.
Falling prices meant that real interest rates—nominal rates minus inflation—were rising. Household and business debts, in other words, were growing harder to pay off. Officials were stumped over what else the central bank should do, if anything.
It could purchase Japanese government bonds, the academics said—a money-pumping approach now called quantitative easing. But having just gained independence from the Ministry of Finance, Bank of Japan officials were reluctant to start funding the government. And buying bonds exposed the central bank to big losses if private investors starting shedding the investments.
At a conference at sponsored by the Boston Fed in Woodstock, Vt., that October, Kazuo Ueda, then a BOJ policy member, issued a warning to the largely American audience: "Do not put yourself into the position of zero rates," he said. "I tell you it will be a lot more painful than you can possibly imagine."
Mr. Bernanke shot back that Japanese policy makers might be making the same "extreme policy mistakes" Americans made in the 1930s—being too timid about reversing deflation. A few weeks later, in a blistering research paper, he said even though conventional tools were expended, there was plenty the Japanese could do to boost consumer demand, business spending and prices.
Among his suggestions: Cheapen the yen by selling it in the currency markets; or buy long-term debt from the Ministry of Finance to finance tax cuts, something he said was akin to just dropping money from a helicopter.
One objection at the time was that Japan's economic problems weren't the result of too little stimulus by the central bank but of structural problems in Japan's banking system and in protected industries.
Mr. Bernanke said structural problems didn't negate the need to find ways to push up consumer demand and business spending.
"Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced," he concluded. "Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn't absolutely guaranteed to work."
Mr. Bernanke was particularly troubled by Japan's emerging deflation. He argued that Bank of Japan officials had to aggressively manage the public's expectations, because convincing households and businesses that deflation wouldn't persist would help to spur economic activity.
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