Comment on ‘It Takes More than a Bubble to Become Japan’

Adam Posen raises some big questions about the interaction of asset price bubbles, economic growth and deflation, and the scope for monetary policy to respond. He has some answers and I broadly agree with his diagnosis and assessment. Certainly there are few more interesting case studies than Japan on the interaction of asset prices, the macro-economy, and policy. Japan stands out as the most serious example in the past two decades of how rises and collapses in asset prices can have a devastating impact on the economy. As Adam shows, it is a complex story. This complexity means that many, not just one, factor is at play and that the resolution of the problems requires a set of policy responses. The focus on Japan in this conference serves two purposes. The first is to highlight the cost of bubbles and examine the place for policy action to limit the worst of excesses in asset price bubbles. This is obviously important to the debate now occurring in Australia. The second purpose is to focus o