The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper

Since the latter half of the 1980s, Japan's economy has experienced the emergence, expansion, and bursting of a bubble economy, characterized by a rapid rise in asset prices, the overheating of economic activity, and the expansion of money supply and credit. This paper examines the mechanism by which the bubble economy was generated and summarizes lessons a central bank should draw from the experience in order to prevent it from happening again. Specifically, by focusing on the intensified bullish expectations that played an important role behind the large fluctuations in asset prices and the economy, the process of the emergence, expansion, and bursting of the bubble is examined in relation to the monetary policy at the time. Based on this analysis, the paper discusses a framework for monetary policy conducive to achieving both price stability and financial system stability.