Working Paper: NBER ID: w15726
Authors: Takatoshi Ito
Abstract: Japan suffered a very high inflation rate in 1973-74. The CPI inflation rate rose to near 30% in 1974, the highest rate in the postwar Japanese history after the chaotic hyperinflation following the end of the Second World War. Traditionally, the oil crisis is blamed for the 1973-74 high inflation. However, due to monetary policy decisions in 1972-73, the inflation rate had already exceeded 10% before the onset of the oil crisis in October 1973. These decisions include the interest rate cut of June 1972 and the interest rate hike of April 1973, which in retrospect proved too small. Concern about the rapid yen appreciation produced political pressure on the Bank of Japan to continue easing. The Bank of Japan came out of the Great Inflation of 1973 with a stronger voice. The Bank successfully argued that its recommendation to tighten monetary policy should not be overruled or the high inflation would be repeated. By this logic, the Bank of Japan obtained /de facto/ independence after 1975. When faced with the next economic recovery in 1979, again accompanied by oil price increases, the Bank of Japan was able to tighten monetary policy and to contain the inflation rate under 10 percent. The interest rate in the 1972-75 period was well below, by as much as 25 percentage points in 1973, the interest rate suggested by a modified monthly Taylor rule regression.
Keywords: No keywords provided
JEL Codes: E02; E31; E58; N15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank of Japan's monetary policy decisions (E52) | inflation rates (E31) |
| interest rate cuts in June 1972 and insufficient hikes in April 1973 (E52) | heightened inflation rates (E31) |
| political pressures and government's influence on the Bank's decisions (E58) | effectiveness of monetary policy (E52) |
| Bank's independence post-1975 (E58) | ability to manage inflation effectively (E31) |
| lessons learned from 1973-1974 inflation episode (E65) | Bank's credibility and independence during 1979-1980 (E58) |