Well-functioning financial systems are important in achieving sustained economic growth. They play a crucial role in channeling household savings into the corporate sector and allocating investment funds among firms.
The direct investment of Japanese businesses to East Asian economies accelerates the reallocation of their production bases. Consequently, between Japan and the other East Asian countries, both exports and imports are growing substantially.
However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound.
With weak balance sheets, banks tend to continue lending unprofitable businesses and leave them existing.
The aging and decreasing population is a serious problem in many developed countries today. In Japan's case, these demographic changes are taking place at a more rapid pace than any other country has ever experienced.
In this context, the current recovery in the Japanese economy is taking place in tandem with the growing interdependence with the rest of the world, particularly with the other East Asian economies.
In fact, the recent increase in intra-firm trading enables businesses to shift their activities across borders smoothly, thereby strengthening the response of economic activity to exchange rate movements in the long run.
They emphasize the viewpoint that the protracted economic stagnation in Japan derives from incomplete economic adjustments to significant changes in relative prices.
