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ABSTRACT
This paper describes the record of Japanese monetary policy since the late 1990s from the viewpoint of practical experience as well as theoretical insight. So-called unconventional monetary policies were implemented in Japan earlier than in other developed economies. Because aspects of these policies are multidimensional, a number of perspectives are necessary to evaluate their effect. Although no clear conclusion can be drawn thus far as to their effectiveness in terms of boosting business activities, the zero interest rate policy and quantitative easing policy had clear effects in terms of stabilizing the financial system. For the past two decades, the main policy task of the Bank of Japan has been to overcome prolonged deflation. This incurred a challenge to central bank independence, as the established policy framework (inflation targeting) is oriented to taming inflation but not necessarily deflation. In addition, the management of public-sector debt, the sometimes-forgotten task of a central bank, has emerged as a high-profile issue in both Japan and other developed economies.
JEL Classifications: E44, E52, E58
Keywords: unconventional monetary policy; zero interest rate policy; quantitative easing policy; comprehensive monetary easing; inflation targeting
I. INTRODUCTION
Soon after achieving full independence as a central bank in 1998, the Bank of Japan (BOJ) found itself embarked on stormy seas. Its independence compares favorably with global standards, but it has sometimes faced harsh criticism and its path has often been a challenging one.
The challenges faced by the BOJ actually date back two decades. As the 1990s began, Japan confronted the legacy of its collapsed bubble economy. Massive obstacles-termed the "three excesses" in debt, capacity, and employment-blocked the way. These obstacles prevented a smooth recovery in the Japanese economy for more than 10 years. (Figure 1 and Figure 2)
A look at the financial factors behind the three excesses just noted shows that excess debt required borrowers to continue to repay obligations until they could return to an optimal level of leverage. At the time, this process was a severe one since lenders (banks) were likewise required to cut lending to boost their capital position, which had been impaired by the accumulation of nonperforming loans (NPLs). In these circumstances, it is easy to see that standard monetary easing, in which interest rates were...