Decline in Oil Prices and the Negative Interest Rate Policy in Japan

20 Pages Posted: 9 Nov 2016 Last revised: 4 Jan 2017

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Farhad Taghizadeh Hesary

Waseda University

Date Written: October 7, 2016


In April 2013, the Bank of Japan (BOJ) introduced an inflation target of 2% with the aim of overcoming deflation and achieving sustainable economic growth. But due to lower international oil prices it was unable to achieve this target and was forced to take further measures. Hence, in February 2016, the BOJ adopted a negative interest rate policy by massively increasing the money supply through purchasing long-term Japanese government bonds (JGBs). The BOJ had previously only purchased short-term government bonds, a policy that flattened the yield curve of JGBs. On the one hand, banks reduced the number of government bonds they purchased because short-term bond yields had become negative. Even the interest rates of long-term government bonds up to 15 years became negative. On the other hand, bank loans to the corporate sector did not increase, due to the Japanese economy’s vertical investment-saving (IS) curve. This paper firstly explains why, in the view of the authors, the BOJ has to reduce its 2% inflation target in the present low oil price era. Secondly, it argues that Japan cannot make a sustainable recovery from its long-lasting recession and tackle its long-standing deflation problem by means of its current monetary policy and its negative interest policy in particular. It is of key importance to make the IS curve downward rather than vertical. That means the rate of return on investment must be positive and companies must be willing to invest even if interest rates are set too low. Japan’s long-term recession is due to structural problems that cannot be solved by its current monetary policy.

Keywords: oil prices, negative interest rates, 金融政策, 量的金融緩和政策, 原油価格、吉野直行

JEL Classification: E52, E63, Q43

Suggested Citation

Yoshino, Naoyuki and Taghizadeh Hesary, Farhad, Decline in Oil Prices and the Negative Interest Rate Policy in Japan (October 7, 2016). ADBI Working Paper 600. Available at SSRN: or

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008

Farhad Taghizadeh Hesary

Waseda University ( email )

1-6-1 Nishi-Waseda,
Shinjuku, Tokyo 169-8050

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