Further Monetary Easing Policies under the Non-negativity Constraints of Nominal Interest Rates: Summary of the Discussion Based on Japan's Experience

This paper examines issues surrounding monetary policy under zero interest rates based on one and a half yearfs experience in Japan. After reviewing the market development in Japan, it summarizes the transmission mechanism of monetary policy under zero nominal interest rates, and considers what would be the likely policy options if a central bank were to conduct further monetary easing. Specifically, a more detailed policy announcement is regarded as feasible, less costly, and the less risky option, although additional effects of monetary easing through this measure are relatively limited. On the other hand, introduction of a temporary fixed exchange rate system and a huge increase in the outright purchase of medium- and long-term government bonds can induce relatively large effects, although the uncertainty in the effects as well as the accompanied costs and risks may be very large. In addition, the paper considers the validity of introducing inflation targeting. It summarizes that inflation targeting is not necessarily easy to distinguish from traditional policy management based on an overall consideration. Furthermore, given recent tendencies in Japan, the paper argues that the introduction of inflation targeting in the current situation might impair the conduct of monetary policy in the absence of preconditions for benefiting from its intrinsic merits.

Asset Price Bubbles, Price Stability, and Monetary Policy: Japan' s Experience

Japan's economy has experienced an extremely large swing against the backdrop of the emergence, expansion, and bursting of asset price bubbles. When examining the emergence and bursting of the bubble economy from the viewpoint of monetary policy management, should the Bank of Japan have given more consideration to asset price fluctuations in formulating its monetary policy? Or, should the Bank not have been perplexed with asset price fluctuations and conducted policies focusing only on the general price level such as inflation targeting? In answering these questions and deciding policy actions, to what extent should the Bank consider financial system problems? This paper aims at forming some tentative answers to these questions.

Asset Price Fluctuations, Structural Adjustments, and Sustained Economic Growth: Lessons from Japan's Experience since the Late 1980s

In this paper, we examine implications of asset price fluctuations and resultant structural adjustments on sustained economic growth, based on Japan's experience since the latter half of the 1980s. In doing so, we offer the view that the protracted economic stagnation in Japan can be seen as a result of the incomplete economic adjustments to significant changes in relative prices, in part triggered by the bursting of the asset price bubble. Such changes in relative prices include movements in both intertemporal and cross-sectional dimensions, which interacted crucially to lower the economy's trend growth. This aspect of Japan's asset price bubble, with its consequences for structural adjustments since the 1990s, is important because it illustrates the specific environment in which the Bank of Japan has to conduct monetary policy: namely, not a standard stabilization policy around a stable growth trend. Rather, it has operated in an environment of unanswered policy management questions coupled with hampered sustained growth.

Policy Duration Effect under Zero Interest Rates: An Application of Wavelet Analysis

A major feature of recent monetary policy in Japan has been heavy reliance on the so-called policy duration effect. This policy employs a commitment to compensate for the central bank’s inability to lower the interest rate below zero by altering the anticipated course of monetary policy actions. This paper analyzes the behavior of the yield curve and examines the effectiveness and limitations of monetary policy commitment under zero interest rates with four indicators for policy duration effect. Specifically, we extend our previous study (Okina and Shiratsuka (2003)) by applying wavelet analysis to indicators for policy duration effect. As in the previous study, the policy duration effect was found to be highly effective in stabilizing market expectations for the path of short-term interest rates, thereby reducing longer-term interest rates and flattening the yield curve. The policy duration effect, however, failed to reverse deflationary expectations in financial markets.zero interest rate policy, quantitative monetary easing, policy duration effects, policy commitment, wavelet analysis

Monetary Policy under Zero Inflation: A Response to Criticisms and Questions Regarding Monetary Policy

The Japanese economy has recently been faced with massive nonperforming assets and a large output gap. Thanks to the historically unprecedented accommodative monetary policy of the Bank of Japan (BOJ), prices have generally been stable and severe deflation has been avoided. Despite this, the BOJ has been questioned and criticized regarding its conduct of monetary policy. For example, why doesn't it adopt inflation targeting? Why has the BOJ stubbornly refused to increase the outright purchase of long-term government bonds? Why does the BOJ implement fund absorption operations in the middle of monetary easing? This paper tries to evaluate questions and criticisms regarding the conduct of the BOJ's monetary policy under zero inflation by using the following two criteria: (1) the BOJ will take measures necessary to achieve the sound development of the national economy through the pursuit of price stability in the long run; however, (2) the BOJ will not take such measures if the side effects are deemed greater than the effects, which makes it difficult to achieve the objective in (1).

Comments on "Price Stability and Japanese Monetary Policy."

This commentary summarizes the authors' main points of agreement and disagreement with respect to the proposal written by Dr. Hetzel. The authors agree with Dr. Hetzel's proposal on four points: after a central bank has lowered the interest rate to zero, (1) a central bank is not in fact powerless to stop deflation; (2) it does not make sense to focus on the quantity of the monetary base per se; (3) it is important to influence market expectations if monetary policy is to be effective; and (4) central bank solvency holds some importance. The authors disagree with Dr. Hetzel's proposal on three points: (1) transmission channels of quantitative easing; (2) potential costs and benefits of his proposal; and (3) the timing of introduction of an explicit nominal anchor.

Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists

Various proposals have been raised with respect to a desirable framework of monetary policy under the zero interest rate in Japan. By taking due account of such proposals, this paper intends to examine monetary policy options under the environment of the zero interest rate. In so doing, we first describe the policy framework of the "zero interest rate policy," which was in place from February 1999 to August 2000, and its transmission mechanism. Then, in view of the problems intrinsic to the zero interest rate, we address three important questions: (1) the policy options that might be available in response to future economic developments, (2) the major risks associated with these policy options; and (3) how such risks might change under varying economic conditions. On this basis, we finally consider the medium- and long-term "style" of monetary policy in Japan in order to improve its effectiveness and efficiency.

Financial Market Globalization: Present and Future

It is widely recognized that financial market globalization has been developing. International financial markets have expanded substantially, and transaction volumes in foreign exchange markets and capital markets have increased markedly. Progress in information and telecommunications technologies, liberalization in capital markets, and development of new financial instruments have further stimulated international capital flows, leading to more expansion and efficiency in international financial markets. However, empirical evidence suggests that national borders have been serving as some sort of barriers to international capital flows. Portfolios of investors based in industrialized countries are biased toward domestic assets (the "home bias puzzle"), and national savings tend to be absorbed domestically (the "Feldstein-Horioka paradox"). From a long-term historical perspective, the size of net capital flows has not increased so much. Alternatively, such development of globalization can be viewed differently once we take account of other aspects such as off-balance sheet transactions. Derivative instruments offer the possibility of unbundling risks inherent in underlying assets, and such unbundled risks can be repackaged and dealt in separately. Thus, cross-border derivatives transactions enhance the effectiveness of risk transfer. Given the recent growing trend toward financial globalization, how and at what pace financial globalization will develop in the future have important implications for the conduct of monetary policy by central banks. If financial markets become further integrated and international capital flows more actively, it is obvious that independent monetary policy directed toward domestic goals, liberalization of capital mobility, and fixed foreign exchange rates cannot be achieved simultaneously. In addition, prudential policy might face new problems pertaining to the stability of the financial system due to increasing international linkage

News and the Dollar/Yen Exchange Rate, 1931-1933: The End of the Gold Standard, Imperialism, and the Great Depression

According to the efficient market hypothesis, news in Tokyo is responsible for the exchange rate changes during the Tokyo market hours, while the U.S. news is responsible for changes in the New York hours. The intra-daily dynamics of the $/yen exchange rate from December 1931 to November 1933 is analyzed. Japan's decision to go off gold in December 1931 depreciated yen by 30% in a month, mostly in the Tokyo market. During 1932, the yen depreciated another 30%, mainly due to Japan's aggression in China and resulting diplomatic isolation. In 1933, the yen appreciated against the dollar, mainly in the New York market, due to the U.S. decision to go off gold. However, exchange rate volatility and its sensitivity to news declined over the two year period, because of increasing capital controls. Changes in the interest rate differential was found insignificant for the changes in the exchange rate. Political regime changes, such as a decision to go off gold, most influenced the exchange rate for the period considered. There were no policy decisions by Japan to cause yen depreciation to promote export and limit import in 1931-33.

The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper

Since the latter half of the 1980s, Japan's economy has experienced the emergence, expansion, and bursting of a bubble economy, characterized by a rapid rise in asset prices, the overheating of economic activity, and the expansion of money supply and credit. This paper examines the mechanism by which the bubble economy was generated and summarizes lessons a central bank should draw from the experience in order to prevent it from happening again. Specifically, by focusing on the intensified bullish expectations that played an important role behind the large fluctuations in asset prices and the economy, the process of the emergence, expansion, and bursting of the bubble is examined in relation to the monetary policy at the time. Based on this analysis, the paper discusses a framework for monetary policy conducive to achieving both price stability and financial system stability.