Notes 1. `A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero ± so injecting monetary base into the economy has no effect, because base and bonds are viewed by the private sector as perfect substitutes' (Krugman, 1998). 2. In Krugman (1998) the answer has to do with people switching between alternative financial assets. The fact that such a massive switching of assets has not been observed, as a zero nominal interest rate has been approached over the last few years, ought to call the underlying model into question. Instead Krugman takes the fact that the nominal interest rate has not actually fallen below zero as evidence that it cannot do so. 3. It is worth noting that for the top income earners, Japan (at least in 1998, according to the OECD, 1999) gives a much bigger tax break for inves- tors who get their returns in the form of interest on bank deposits. This may have encouraged continuing bank deposits, and been nice for the banks. But it does not seem to be a good way to encourage savings in forms that will generate the highest future per capita GNP.
Murray Frank 363 4. It would seem that an important policy issue for Japan is to make better savings vehicles available to the citizens. An easy way to do this would be to encourage the creation of a menu of index funds based on a range of international stock and bond indexes. These should probably be offered both with and without exchange rate insurance clauses, so that indivi- duals can decide whether to undertake such a risk. It is important that these indexed investment vehicles should be offered by financial institu- tions the Japanese people have long experience with and can trust. Unfortunately this is not the right place to go into greater detail about this issue. References Cai, Jun, K. C. Chan and Takeshi Yamada (1997) `The Performance of Japanese Mutual Funds', Review of Financial Studies , vol. 10, pp. 237±74. Easterly, William and Hairong Yu (1999) `Global Development Network Growth Database', World Bank ( GDNdata.htm). Hoshi, Takeo and Anil Kashyap (1999) `The Japanese Banking Crisis: Where Did It Come From and How Will It End?', NBER Working Paper W7250 (Cambridge, Mass.: NBER). IMF (1999) International Financial Statistics (Washington, DC: IMF). Krugman, Paul (1998) `It's Baaack! Japan's Slump and the Return of the Liquidity Trap', working paper, MIT ( bpea_ jp.pdf). OECD (1999) `Economic Survey of Japan, 1999', policy brief (Paris: OECD).
13 Environmental Issues and Japanese Firms Kozo Horiuchi and Masao Nakamura 1 LOCAL ENVIRONMENTAL ISSUES While the Japanese economy enjoyed unprecedentedly high growth in the late 1960s, Japan's natural environment deteriorated rapidly. Many Japanese factories dumped effluent containing harmful pollut- ants into rivers and oceans and emitted other pollutants into the air.