Abstract
Chapter 2 provides an overview of the circumstances of measures by the Bank of Japan against deflation. Triggered by the bursting of the asset bubble that peaked in 1990, Japan’s deflation occurred in 1997 and 1998. The Bank of Japan was forced to take unprecedented deflationary measures. The zero-interest rate policy and the quantitative easing (QE) policy were called unconventional monetary policy. The japanese economy, which seemed to have recovered through deflationary measures accompanied with time-duration effect, fell back into deflation due to the global financial crisis in September 2008. Quantitative and qualitative easing monetary policy (QQE) in April 2013 was a measure to achieve the 2 percent inflation target by judging that deflation is a monetary phenomenon. The 2 percent CPI estimate, however, started to falter since the consumption tax hike from 5 to 8 percent in April 2014. QQE with a negative Interest Rate in January 2016 and QQE with Yield Curve Control in September 2016 were announced, but these measures did not achieve the inflation target. On the other hand, the consumption tax rate was raised again from 8 to 10 percent in October 2019.
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Notes
- 1.
Black Monday was the first financial crisis since the end of World War II. However, unlike the subsequent financial crises, there were no non-performing loans held by financial institutions, nor was there a diffusion of risk through securitized products. Therefore, with a “crisis management system” providing a large amount of liquidity in financial markets, the Fed succeeded in ending the panic in a short period of time.
- 2.
After this, the consumption tax rate will be raised from 3 to 5% in 1997, from 5 to 8% in 2014, and from 8 to 10% in 2019. Each time it had a more negative impact on the economy than the policy authorities expected.
- 3.
The Japan depression finally bottomed out in 2002.
- 4.
The Japan financial crisis could be finally solved by injecting public funds directly into financial institutions. On the other hand, the U.S. financial crisis triggered by the Lehman shock in 2008 was an expansion of the crisis through securitized products. In the case of Japan nonperforming loans affected the real economy, while in the case of the United States credit instability in securities spreaded the crisis through financial markets. They are different in type.
- 5.
During this period, the guidance for financial institutions belonged to the Ministry of Finance. The separation of fiscal and monetary systems took place after the economy fell into a financial crisis in 1997, when authority for institutional design of the financial system was transferred to the Financial Services Agency. At present, monetary policy consists of institutional design managed by the Financial Services Agency and policy management by the Bank. The Bank of Japan Act was newly enacted in 1998, and the mechanism of policy conduct at that time was quite different from the present.
- 6.
Since the Lehman shock, central banks around the world have adopted this type of policy management, so the policy duration effect is now called forward guidance. In any case, Japan’s policy experience during this period has become the basis for subsequent deflationary countermeasures.
- 7.
The Bank has not changed its reserve requirement ratio since 1991. In addition, the official discount rate was renamed to the base discount rate and the basic loan rate, and the Bank lends to financial institutions that meet the conditions by the Lombard-Type Lending Facility, so since then the role of the Bank is to be a passive conduct.
- 8.
Decisions at the Monetary Policy Meeting are made by the deliberations of nine Policy Board members. Two government representatives can participate in the meeting, but they do not have the right to vote, only request the postponement of the proposed decision until the next meeting. At this time, the government's request to postpone the cancellation of the zero-interest rate policy was rejected by the committee, and then the decision to cancel the zero-interest rate policy was decided.
- 9.
Bank of Japan (2001).
- 10.
Since the announcement of QE in 2001, the attention has been paid to Outlook for Economic Activity and Prices, in which the Policy Board members publish forecasts of the economic growth rate and the CPI.
- 11.
Bank of Japan (2006).
- 12.
Bank of Japan (2006).
- 13.
The understanding of price stability was subsequently adopted as the commitment of the comprehensive monetary easing in 2010, changed its name to the price stability target in 2012, and finally reached the price stability target of 2% (inflation target) in 2013.
- 14.
The research on the relationship between the central bank and financial markets based on game theory has been actively conducted since the 1980s and practiced in the style of “dialogue with the market” since Greenspan's presidency of the Fed in 1987.
- 15.
Bank of Japan (2010).
- 16.
One of the reasons why QE conducted between 2001 and 2006 was successful was the use of this surprise effect. The surprise effect at the introduction of monetary easing was maximized in the subsequent QQE.
- 17.
The joint statement by the government and the Bank of Japan, which will be described later, was also released at the same time as the inflation target.
- 18.
Until then, the term “understanding of price stability” or “price stability goal” was used, and here for the first time, the “price stability target” was clearly announced.
- 19.
Bank of Japan (2013).
- 20.
In QE the outstanding balance of current accounts at the Bank is the numerical value of the operating target, but in QQE, it is the monetary base. The reason was that the monetary base was more understandable in terms of publication although the function from an economic policy point of view is the same.
- 21.
Monetary financing or monetization refers to the issuance of currency by a central bank to fund national finances.
- 22.
Bank of Japan (2014).
- 23.
Bank of Japan (2016).
- 24.
In particular, the Bank divides current accounts held by financial institutions at the Bank into three tiers (Policy-Rate Balances, Macro Add-on Balances, Basic Balances) and imposes a negative interest rate (minus 0. 1%) on the Policy-Rate Balance part. Other two are respectively imposed 0 and 0.1%. Therefore, a negative interest rate refers to only the application of minus 0.1% to the Policy-Rate Balances.
- 25.
Bank of Japan (2016).
- 26.
Bank of Japan (2016).
- 27.
Bank of Japan (2018).
References
Bank of Japan. New Procedures for Money Market Operations and Monetary Easing. March 19, 2001.
Bank of Japan. Change in the Guideline for Money Market Operations. March 9, 2006.
Bank of Japan. The Introduction of a New Framework for the Conduct of Monetary Policy. March 9, 2006.
Bank of Japan Comprehensive Monetary Easing. October 5, 2010.
Bank of Japan. Introduction of the “Quantitative and Qualitative Monetary Easing.” April 4, 2013.
Bank of Japan. Expansion of the Quantitative and Qualitative Monetary Easing. October 31, 2014.
Bank of Japan. Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate.” January 29, 2016.
Bank of Japan. New Framework for Strengthening Monetary Easing: “Quantitative and Qualitative Monetary Easing with Yield Curve Control.” September 21, 2016.
Bank of Japan. Comprehensive Assessment: Developments in Economic Activity and Prices as well as Policy Effects since the Introduction of Quantitative and Qualitative Monetary Easing (QQE). September 21, 2016.
Bank of Japan. Strengthening the Framework for Continuous Powerful Monetary Easing. July 31, 2018.
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Sakai, Y. (2024). Timeline of Economic Policies in Japan. In: Deflation and Fiscal Deficits. SpringerBriefs in Economics. Springer, Singapore. https://doi.org/10.1007/978-981-97-0415-6_2
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