Japan's Deflation and the Bank of Japan's Experience with Nontraditional Monetary Policy
Article first published online: 3 FEB 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue Supplement s1, pages 175–190, February 2012
How to Cite
UEDA, K. (2012), Japan's Deflation and the Bank of Japan's Experience with Nontraditional Monetary Policy. Journal of Money, Credit and Banking, 44: 175–190. doi: 10.1111/j.1538-4616.2011.00485.x
- Issue published online: 3 FEB 2012
- Article first published online: 3 FEB 2012
- Received November 30, 2010; and accepted in revised form October 7, 2011.
- nontraditional monetary policy;
- Bank of Japan;
- zero lower bound on interest rates
This paper offers a brief summary of nontraditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades, especially the period 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 nonsterilized, 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 the pure form 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 less clear-cut. The strategies, however, have failed to bring the Japanese economy out of the deflation trap so far. I discuss some possible reasons for this and also implications for the current U.S. situation.