Specialisation: Macroeconomics, Japan, Asia, banking and finance, international integration
In the 1970s and 1980s Japan’s economic growth was regarded as miraculous and mysterious. How had a war-ravaged country managed such a dramatic turnaround with an economic model so apparently different from the dominant paradigm? 1980’s research demonstrated that insights from economics did apply to the Japanese case but conventional models needed to be extended to explain it adequately. Moreover, the experience of Japan could be used to enrich economic models. My own research showed that monetary policy in bank-dominated financial systems like Japan operated differently from that in capital-market systems. With fixed exchange rates and controls on interest rates, monetary policy is transmitted through credit channels: the quantity of bank lending becomes the dominant transmission mechanism and has ripple effects on portfolio and investment decisions by all sectors of the economy. The importance of credit rationing and credit transmission was gradually incorporated into mainstream economics, most famously in the work of Joe Stiglitz and Ben Bernanke, later President of the US Federal Reserve system.
The lesson that Japan’s experience is relevant to other economies has been repeated many times. Japan experienced a banking crisis and protracted economic slowdown in the 1990s, brought on by an asset price bubble that was initially ignored and then savagely burst by deliberate policy action. The fault lay not in having a bank-centred economy but with policies that protected incumbents and were slow and weak to recapitalize banks and force bad loan write offs. Understanding the strengths and weaknesses of Japan’s banking structure informed my policy advice to the World Bank and the EU on the design of financial systems for East European countries transitioning from socialism and on the causes and consequences of the Asian financial crisis. That advice challenged the prevailing view that stock markets were the key to financing industrial investment in market economies, and made the case that well-regulated banking systems provided essential corporate governance along with finance, in countries with weak governance. This view was eventually reflected in the reverse course followed for Eastern Europe and encouraged stronger bank regulation in East Asia alongside the development of capital markets. My research on the Asian crisis subsequently led me to work on how financial systems are connected across borders via capital movements but also through trade in financial services, and the implications for cross-border regulation.
More recently, Japan’s slow economic growth over two decades is often presented as a curiosity that defies rational economic explanation, or is attributed to incompetent policy. In fact, it can again be understood by appropriately-nuanced economic models. Those models themselves have been changing to reflect what we’ve learned from Japan’s experience, as I described in my keynote lecture to the Australian Conference of Economists in 2012. Many countries will follow Japan to become post-industrial economies with ageing populations and prolonged experience of price deflation. Writing this off as incompetence or irrelevance is not only poor science but misses important lessons, both positive and negative. My research has been designed to show they apply in many other circumstances and ignoring them risks repeating the errors of history and missing opportunities for innovation in policy.
Australian National University;
University of Oxford
Centre for Economic Policy Research (London)
St Antony’s College (Oxford)
Order of the Rising Sun Gold Rays with Neck Ribbon
1. Corbett, J & Xu, Y (eds) 2015, Rebalancing Economies in Financially Integrating East Asia, Routledge-ERIA Studies in Development Economics, London and New York: Taylor and Francis/Routledge.
2. Corbett, J 2012, “Has Japan’s Lost Decade(s) Changed Economic Thinking?”, Economic Record. Volume 88, Special Issue, pp 100-105.
3. Corbett, J, Onji, K & Vera, D 2012, “Capital Injections, Restructuring Targets and Personnel Management”, Journal of Japanese and International Economies. Volume 26, Issue 4, pp 495-517.
4. Corbett, J & Tyers, R 2012, “Japan’s Economic Slowdown and its Global Implications: A Review of the Economic Modelling”, Asia Pacific Economic Literature. Vol 26, Issue 2
5. Corbett, J, Gai, P & Onji, K “The Banking System in East Asia and The Transmission of The Global Financial Crisis”, 2012, Chapter 7 in Thangavelu, S & Chongvilaivan, A (eds), Real and Financial Integration in Asia, Routledge-ERIA Studies in Development Economics,
Email: Jenny.Corbett [at] anu.edu.au