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Japan's Deflation and the Bank of Japan's Experience with Non-traditional Monetary Policy

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  • Kazuo Ueda

    (Faculty of Economics, University of Tokyo)

Abstract

This paper offers a brief summary of non-traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades, especially the period between 1998-2006, when the so-called Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) were put in place. The paper begins with a typology of policies usable at low interest and inflation rates. They are: strategy (i), management of expectations about future policy rates; strategy (ii), targeted asset purchases; and strategy (iii), QE. Alternatively, QE may be decomposed into a pure attempt to inflate the central bank balance sheet, QE0, purchases of assets in dysfunctional markets, QE1 and purchases of assets to generate portfolio rebalancing, QE2. Strategy (ii), when non-sterilized, is either QE1 or QE2. Using this typology, I review the measures adopted by the BOJ and discuss evidence on the effectiveness of the measures. The broad conclusion is that strategies (i) and (ii) have affected interest rates, while no clear evidence exists so far of the effectiveness of strategy (iii), or QE0. Strategy (ii) has been effective especially in containing risk/liquidity premiums in dysfunctional money markets; that is, QE1 has been effective. The effectiveness of QE2, however, is unclear. The strategies, however, have failed to bring the economy out of the deflation trap so far. I discuss some possible reasons for this and also implications for the current U.S. situation.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/245.pdf
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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-235.

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Length: 24 pages
Date of creation: Oct 2010
Date of revision: Oct 2011
Handle: RePEc:cfi:fseres:cf235

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  1. Naohiko Baba & Motoharu Nakashima & Yosuke Shigemi & Kazuo Ueda, 2005. "The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market," CIRJE F-Series CIRJE-F-339, CIRJE, Faculty of Economics, University of Tokyo.
  2. Michael Woodford & Vasco Curdia, 2010. "The Central Bank's Balance Sheet as an Instrument of Monetary Policy," 2010 Meeting Papers 136, Society for Economic Dynamics.
  3. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
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Cited by:
  1. Koeda, Junko, 2013. "Endogenous monetary policy shifts and the term structure: Evidence from Japanese government bond yields," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 170-188.
  2. Schenkelberg, Heike & Watzka, Sebastian, 2013. "Real effects of quantitative easing at the zero lower bound: Structural VAR-based evidence from Japan," Munich Reprints in Economics 19757, University of Munich, Department of Economics.
  3. Kazuo Ueda, 2011. "Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007," CIRJE F-Series CIRJE-F-828, CIRJE, Faculty of Economics, University of Tokyo.
  4. Kazuo Ueda, 2013. "The Response of Asset Prices to Abenomics: Is It a Case of Self-Fulfilling Expectations?," CIRJE F-Series CIRJE-F-885, CIRJE, Faculty of Economics, University of Tokyo.

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