Monetary policy in Japan: A review of the Heisei Period

This paper discusses Japan's monetary policy during the Heisei Period (1989–2019), an era of roughly 30 years that included the boost and bursting of the bubble economy and the subsequent deflationary period. In doing so, in addition to focusing on points of dispute regarding the individual unconventional monetary policies that began about 20 years ago and continue today, it also will discuss monetary discipline, inflation targeting, and their relationship to fiscal policy. Lastly, it will discuss the role that should be taken by the Bank of Japan as an independent central bank in changing environments.

Monetary discipline means making the best use of market mechanisms to manage monetary policy. It has the features of adopting competitive bidding, limiting the purchase of assets for market operation to short- term government debt, and minimizing the size of central bank assets. Although central banks have traditionally emphasized this type of discipline, unconventional monetary policy is the process of loosening the constraints of monetary policy. Japan is typical.

The current monetary policy, Quantitative and Qualitative Monetary Easing (QQE), has not achieved its targets after six years of operation. This is mainly due to the stagnant growth potential of the economy. The former discussion of central bank independence in controlling inflation in the 1990s no longer makes sense in the current environment. As an independent agency, the central bank is expected to check government economic policies from a non-political and longer-term standpoint than government agencies.