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Monetary policy strategy and inflation in Japan

Author

Listed:
  • Fructuoso Borrallo Egea

    (Banco de España)

  • Pedro del Río López

    (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.

Suggested Citation

  • Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Monetary policy strategy and inflation in Japan," Occasional Papers 2116, Banco de España.
    • Handle: RePEc:bde:opaper:2116e
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    2. Alberola, Enrique & Cheng, Gong & Consiglio, Andrea & Zenios, Stavros A., 2023. "Unconventional monetary policy and debt sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    monetary policy; inflation; inflation expectations; interest rates;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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