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The Bank of Japan's Struggle with the Zero Lower Bound on Nominal Interest Rates: Exercises in Expectations Management

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  • Kazuo Ueda

Abstract

This paper reviews and evaluates the Bank of Japan (BOJ)'s monetary policy during the period 1998-2005. In doing so, it pays particular attention to the development of academic thinking on what Central Banks can do at or near zero interest rates and its relationship with the actual policy measures adopted by the BOJ. The paper argues that the BOJ has carried out most of the things recommended by academic economists. The most important of these is expectations management as crystallized in the so-called zero interest rate policy (ZIRP). The academic origin of this policy can be found in the seminal work of Krugman. The paper points out, however, that this fact, unfortunately, remained unnoticed by many, and explores the reasons behind this. The paper then goes on to survey the empirical literature on the effects of the measures adopted by the BOJ. The literature has found that the ZIRP has had significant effects on the term structure of interest rates and supported the economy. Finally, the paper discusses the possible reasons for the failure of such measures to stop the deflation of the economy within a short period of time. It points out some difficulties inherent in the expectations management approach and problems created by the impaired financial system. Copyright Blackwell Publishing Ltd. 2005

Suggested Citation

  • Kazuo Ueda, 2005. "The Bank of Japan's Struggle with the Zero Lower Bound on Nominal Interest Rates: Exercises in Expectations Management," International Finance, Wiley Blackwell, vol. 8(2), pages 329-350, August.
  • Handle: RePEc:bla:intfin:v:8:y:2005:i:2:p:329-350
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    References listed on IDEAS

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    1. Takashi Nagahata & Toshitaka Sekine, 2002. "The Effects of Monetary Policy on Firm Investment after the Collapse of the Asset Price Bubble: An Investigation Using Japanese Micro Data," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    2. Nobuyuki Oda & Kazuo Ueda, 2007. "The Effects Of The Bank Of Japan'S Zero Interest Rate Commitment And Quantitative Monetary Easing On The Yield Curve: A Macro-Finance Approach," The Japanese Economic Review, Japanese Economic Association, vol. 58(3), pages 303-328.
    3. Naohiko Baba & Motoharu Nakashima & Yosuke Shigemi & Kazuo Ueda, 2006. "The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
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    Cited by:

    1. Robert Amano & Malik Shukayev, 2012. "Risk Premium Shocks and the Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1475-1505, December.
    2. Domenico Lombardi & Pierre L. Siklos & Samantha St. Amand, 2017. "Government bond yields at the effective lower bound: International evidence," CAMA Working Papers 2017-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Mahito Uchida, 2014. "Towards the end of deflation in Japan ?: Monetary policy under abenomics and the role of the central bank," Sciences Po publications info:hdl:2441/7fp8n6moep8, Sciences Po.
    4. Beechey, Meredith & Hjalmarsson, Erik & sterholm, Pr, 2009. "Testing the expectations hypothesis when interest rates are near integrated," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 934-943, May.
    5. Hiroshi Ugai, 2007. "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(1), pages 1-48, March.

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