The Japanese economy has been in recession since the early 19'1t1s. The economy was burdened with bad debts and underwent a serious deation. The monetary policy measures taken by the central bank to boost the economy were unsuccessful. They only resulted in an increase in the level of debt, which is now equal to almost 13t1% of GDP. There was a decline in consumer and 1 Licmead I: use tr IBS Campinas only. Sam II, Chas oI'ZDZDZDZE. It'st H Business cycle: The US and the Japanese Experience wwwicmrindtoorg business spending because of lack of condence in the economy. Prices fell and the value of assets came down. In order to increase consumer and business spending, the central bank of Japan took action to increase the money supply by reducing the reserve requirement of commercial banks. Lower reserve requirements enhance the commercial banks' ability to lend. [In 19th March 20(11, the Japanese central bank adopted a zero interest rate policy i.e. it reduced its lending rate from [1.15 percent to zero percent, in order to increase liquidity and help the economy to revive. In response, commercial banks started lending at nearzero interest rates. There is some disagreement among economists as to how effective an increase in the money supply is, in stimulating the economy. Even with rates as low as l1.15 percent, consumers and businesses are reluctant to borrow during a recession. Some economists feel that a decrease in interest rates will stimulate exports as the central bank's actions push the yen lower against the dollar. Normally, a zero interest rate monetary policy can give an inationary boost to a depressed economy, as consumer and investor demand leads to increased production and prices. This has not yet happened in Japan. Prices are falling, and consumer spending is erratic. The phenomenon of interest rates at or near zero is clearly abnormal. Hence, the Bank of Japan feels that interest rates will have to be made positive gradually. After a long period of economic uncertainty, J apan's economy has been showing a few signs of recovery. The general expectation is that policy makers will react by pushing interest rates up. But the central bank has claried that it will keep interest rates at their current level because of continued uncertainty about employment and wages. QUESTINS FUR DISCUSSIUN: 1. Why do you think the central bm of Japan announced a zero interest rate policy