The continued fragility of the financial system arguably left the Japanese economy especially vulnerable to additional disturbances that could have otherwise been easily weathered. An economic crisis in Southeast Asia, coupled with a previously planned increase in consumption taxes, resulted in a larger-than-anticipated drag on domestic demand and set the stage for the recession that started in 1997.
But then, what can explain the vast array of opinions on how to resolve the crisis? As I said at the beginning of my speech, the debate runs along the front lines of one of the most well known trade-offs in economics: the trade-off between efficiency and distribution, or, put differently, between sound incentives and burden sharing.