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Is the Bank of Japan a Closet Monetarist? Monetary Targeting in Japan, 1978-1988

  • Takatoshi Ito

This paper investigates whether the Bank of Japan has practiced a monetarist rule since 1975. The Bank of Japan (BOJ) published a report in 1975, stating that it would pay close attention to money supply (M2), and in 1978 started announcing quarterly the "forecast" (targets) of monetary (M2) growth rate. Since 1975. the monetary growth rate has gradually declined, and inflation has subsided without causing a major fluctuation in output. This seems to be a successful case of the monetarist experiment. Has the EOJ practiced a monetarist rule, i.e., an announcement and maintenance of the K2 growth target? This paper reveals that it has not. The BOJ "forecasts" were quite accommodative in that an unexpected increase in actual money supply would make "forecasts" to allow a further increase in money supply. In other words, a "forecast" did not behave like a "target" under a strict monetarist rule. Testing a monetarist rule with "forecasts" is shown to be more powerful than testing with the actual process, under some weak assumptions. One of the necessary assumptions is that "forecasts" are rational expectations, and the rational expectations hypothesis is not rejected by the data. Thus, the conclusion of this paper is negative to a question posed by its title. Takatoshi

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2879.

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Date of creation: Mar 1989
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Handle: RePEc:nbr:nberwo:2879
Note: ME
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  1. Yoshio Suzuki & Akio Kuroda & Hiromichi Shirakawa, 1988. "Monetary Control Mechanism in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 6(2), pages 1-27, November.
  2. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November.
  3. Pierce, James L, 1984. "Did Financial Innovation Hurt the Great Monetarist Experiment?," American Economic Review, American Economic Association, vol. 74(2), pages 392-96, May.
  4. Bennett T. McCallum, 1984. "Monetarist Rules in the Light of Recent Experience," NBER Working Papers 1277, National Bureau of Economic Research, Inc.
  5. Kazuo Ueda, 1990. "Financial deregulation and the demand for money in Japan," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 176-205.
  6. William G. Dewald, 1988. "Monetarism is dead; long live the quantity theory," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-18.
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