In the 1990s it was hit with a number of adverse shocks, from bursting asset bubbles and associated banking system problems early in the decade to the financial meltdown of its Asian trading partners in late 1997. In continuing its efforts to move the economy toward recovery, the Bank of Japan last February lowered short-term interest rates to almost zero.
Although Japan registered surprisingly robust growth in the first half, most observers see private-sector demand as still quite weak despite the low short-term rates. Nevertheless, that the Bank of Japan has apparently exhausted its ability to stimulate the economy through conventional policy. This raises two questions.