toshihiko fukui : on stabilisation policies - a central bankera€™s reflection remarks by mr toshihiko fukui, governor of the bank of japan, at the bank of korea international conference 2005, seoul, 27 may 2005. * 1. * * introduction good morning, ladies and gentlemen. it is my privilege to speak at the beginning of the bank of korea's international conference. at the outset, please allow me to strike a personal note. i meet with bok governor park rather frequently, maybe four or five times a year. at the end of each of our conversations, i am impatient for our next meeting. therefore, it is a tremendous pleasure to see him again this morning, although it is only a month since we had lunch together on a southern japanese island. like our personal relationship, official ties between our two central banks are also close. to avoid using up the time accorded to me, i just point out the fact that, for the first time in many years, the bank of japan posted one official at the japanese embassy in seoul to cultivate better communication with the bank of korea and other contacts here. today's symposium covers a broad range of aspects of macro - economic stabilization policies - that is, monetary and fiscal policies. while the phrase " stabilization policies " has been popular for nearly half a century, we can interpret this in a variety of ways. believing that the profundity of this topic will be revealed in the sessions today, i would rather like to present my personal reflections on japan's economic policy management over the past two decades when we struggled to stabilize our economy. 2. japan's success and failure let me begin with a brief sketch of what japan's economy went through after world war ii. we began the post - war reconstruction by creating a uniquely japanese system. it was built on a tight nexus of the social, political and economic apparatus, with top priority given to attaining high economic growth. among the striking features of this system were political stability, strong bureaucracy, and lifetime employment. the so - called " iron triangle " between politicians, bureaucrats, and business people was very powerful in promoting growth - oriented business models and building an export - led industrial structure. as it turned out, this was a marvelous success. unfortunately, success creates inertia - an intrinsic resistance to change, even when the old system begins to falter. from the early 1980s, globalization and technological innovation began transforming

the world economy, posing new challenges for japan's economy. external imbalances and trade friction led to the currency re - alignment of the plaza accord in 1985. this put deflationary pressures on japan's economy, while making traditional segments of our economy obsolete. in order to fend off the deflationary forces, japan made full use of macro - economic policies. the government stepped up fiscal spending to boost domestic demand. the bank of japan ( boj ) eased monetary policy for an extended period of time, consequently fuelling the rapid boom in the economy. together with various structural factors, these expansionary policies spawned distortions in japan's economy. to name just a few examples, we saw a nation - wide surge in resort area development at the expense of our green environment. we embarked on the re - development of metropolitan tokyo to make it an international financial hub, but with little coherent strategy in hindsight. fiscal profligacy by the government, which i referred to just a few seconds ago, resulted in the building of local roads and ports barely used by travelers - a classical faux pas of pork - barrel politics. such economic frenzy generated irrational growth expectations, further prompting excessive investment in both real and financial assets. as you know, the upshot of this euphoria was the asset bubbles and their subsequent bursting. all these episodes point to one thing : despite the substantial changes in its external circumstances, japan was not able to depart from the development model it cherished during the economic catch - up period. we had many discussions about how to reform our system in the face of the headwind against japan's economy after the plaza accord, but we did not follow our words with action. put differently, it was a reform by word, not in deed. after the collapse of the economic bubbles in the early 1990s, we finally learned that every boom must evaporate some time. an aging population and declining birth rate also forced us to acknowledge the need to revamp our modus operandi so that we could remain viable in global competition. this perception shift marked the beginning of the long adjustment phase from the mid - 1990s - a harrowing decade when japan's private and public sectors tried to reinvent themselves. the corporate sector tried hard to get rid of the negative legacies of the bubble era - that is, excesses in production capacity, labor, and debt. although hard hit by falling employment and wages, the household sector endured relatively well during this