But the surge in 1983 was a spectacular demonstration of the way that a sufficiently expansionary monetary policy can reverse a depressed economy's fortunes. In some important ways, Japan today bears a strong resemblance to the United States in that frightening summer of 1982. But overlaid on these long-term difficulties is a severe recession. Japan's unemployment statistics notoriously understate the true extent of joblessness, but even so the current 4.4 percent rate is the highest in the 45 years the number has been published. Depending on whose estimates you believe, the economy is operating anywhere from 6 percent to more than 10 percent below its capacity.
Japan can no longer use conventional monetary and fiscal policies to get the economy moving.
And Japan's government is already deeply in debt, already running huge deficits. So it might appear that there are no easy answers, that nothing short of a total restructuring of the Japanese economy can turn it around. But over the past year a growing chorus of Western economists has argued against this fatalistic view. After years of warning about the risks of inflation and the importance of sound policy, the BOJ has suddenly begun flooding the market with liquidity. Banks now charge each other only for the administrative costs of making the loan.