Two Decades of Japanese Monetary Policy and the Deflation Problem

73 Pages Posted: 22 Sep 2012

See all articles by Takatoshi Ito

Takatoshi Ito

University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: November 2004

Abstract

This paper reviews Japanese monetary policy over the last two decades with an emphasis on the experience of deflation from the mid-1990s. The paper is quite critical of the conduct of monetary policy, particularly from 1998 to 2003. The Bank of Japan's rhetoric was not helpful in fighting deflation, and the interest rate hike in August 2000 amid deflation was a serious mistake. Deflation can be quite costly, and a key element in both preventing and escaping deflation is the management of expectations, using either price level or inflation targeting, because the zero lower bound on interest rates means that the overnight interest rate can no longer be used as the instrument of monetary policy. This paper proposes how to best manage expectations to exit deflation. Price-level targeting overcomes theoretical problems, such as need for a history dependent strategy, associated with inflation targeting. However, because actions speak louder than words, management of expectations also involves non-conventional monetary policies, a combination of which might have to be tried to help the Japanese economy escape its deflationary trap.

Suggested Citation

Ito, Takatoshi and Mishkin, Frederic S., Two Decades of Japanese Monetary Policy and the Deflation Problem (November 2004). NBER Working Paper No. w10878, Available at SSRN: https://ssrn.com/abstract=2150531

Takatoshi Ito (Contact Author)

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
81-425-80-8356 (Phone)
81-425-80-8333 (Fax)

Ministry of Finance, Tokyo ( email )

3-1-1, Kasumigaseki, Chiyoda-ku
100-8940 Tokyo
Japan
+81-3-3581-4720 (Phone)
+81-3-5251-2144 (Fax)

Frederic S. Mishkin

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
31
Abstract Views
438
PlumX Metrics