Non-traditional monetary policies and their effects on the economy
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Recent Monetary Policy 2
Non‑traditional monetary policies and their effects on the economy Yutaka Harada1 Received: 13 July 2020 / Accepted: 22 July 2020 © Japan Economic Policy Association (JEPA) 2020
Abstract The Bank of Japan has implemented bold monetary policy measures with the aim of achieving the inflation target of 2%. As a result, Japan’s economy has improved. However, as the rate of inflation increase is slow, interest rates have not been rising and financial institutions have expressed growing dissatisfaction. Low interest rates are not unique to Japan, but rather a global phenomenon. Although Japan’s past deflationary monetary policy has led to the decline in nominal growth rates, it cannot fully explain the low interest rates. Having analyzed the reasons behind global low interest rates, the reasons are not yet fully understood. Banks in Japan are dissatisfied with low interest rates in Japan. However, banks’ low profitability would be caused by the structural problem that they are accumulating more deposits than they can lend. Moreover, if interest rates were raised, this would lead to an economic downturn, which would not improve banks’ profitability. Because Japan’s economy has improved due to bold monetary easing, it is necessary to maintain the current expansive monetary policy to stimulate increases in prices and interest rates, and to conduct further monetary easing when necessary. Various options for monetary easing measures could be available; this includes the reduction of the interest rate applied to excess reserves. Keywords Monetary policy · Low interest rate · Banking sector JEL Classification E52
Yutaka Harada is a former Member of the Policy Board, Bank of Japan. * Yutaka Harada [email protected] 1
Nagoya University of Commerce and Business Administration, Nagoya, Japan
13
Vol.:(0123456789)
International Journal of Economic Policy Studies
Introduction The Bank of Japan has implemented quantitative and qualitative monetary easing—or QQE for short—since April 2013 and introduced various additional measures, such as the negative interest rate policy, yield curve control, strengthening the framework for continuous monetary easing and clarification of forward guidance for policy rates, all with the aim of achieving the inflation target of 2%. As a result of these measures, Japan’s economy has been improving. It is true that the economic expansion has not exactly been robust, reflecting such events as the consumption tax hike in fiscal 2014 from 5 to 8%, the latest hike in October 2019 from 8 to 10%, the slowdown in the global economy observed from mid-2015 through early 2016 and from the second half of 2018 to the present. Nevertheless, employment has been improving steadily. Although future developments in consumption after the consumption tax hike and the trade conflict between the United States and China warrant careful attention, to date, the economy has managed to continue its expansion. This paper explains monetary policy measures conducted by the BOJ and what
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