Monetary policy in Japan: a structural VAR analysis

This paper studies the objectives and operating procedures of the Bank of Japan (BOJ) during the period 1975-94. To do this we adapt Bernanke and Mihov's (1995) structural VAR model, which nests several alternative hypotheses concerning central bank behavior. In particular, the model separately identifies the anticipated and unanticipated components of monetary policy, and is capable of distinguishing between interest rate targeting and various types of reserve targeting. ; Three main results emerge from the analysis. First, no single target can explain the BOJ's behavior. Instead, the BOJ appears to weight both variation in the call money rate and variation in nonborrowed reserves, with the weight on the call money rate increasing over time. Second, there is strong evidence that at times the BOJ has employed 'moral suasion' to counter shocks in the demand for borrowed reserves. However, by the second half of the 1980s, this procedure was no longer being used. Third, plots of the overall stance of monetary policy and its unanticipated component clearly reveal that a sharp monetary contraction occurred between early 1990 and late 1992, with an equally sharp expansion since then. Perhaps surprisingly, both the contraction and the subsequent expansion appear to have occurred largely in response to prevailing economic conditions, rather than as an unanticipated change in policy.