Monetary policy strategy and inflation in Japan

Fructuoso Borrallo Egea () and Pedro del Río ()
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Fructuoso Borrallo Egea: Banco de España

No 2116, Occasional Papers from Banco de España

Abstract: Faced with a very prolonged period of low inflation, the Bank of Japan has been modifying its monetary policy strategy over the last two decades, pioneering the use of non-standard measures: it reduced policy interest rates to zero and, more recently, to negative levels, and has implemented several asset purchase programmes, forward guidance and, in September 2016, a yield curve control policy. Despite all these efforts, Japan has continued to experience persistently low inflation, with rates well below the central bank’s target in recent decades. This document analyses the changes in the Bank of Japan’s strategy in its struggle against low inflation, focusing in particular on the reasons that led it to adopt the interest rate control policy, describes how this policy works and its main features, and assesses the results obtained. This new strategy has allowed the Bank of Japan to control the yield curve more effectively and sustainably, reducing the volume of asset purchases and mitigating the potential adverse financial stability effects. However, empirical analysis shows that it has still not succeeded in modifying the adaptive and persistent nature of the process of formation of prices and inflation expectations in Japan.

Keywords: monetary policy; inflation; inflation expectations; interest rates (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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