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Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --

March 14, 2018
Yosuke Okazaki*1
Nao Sudo*2


In this paper, we explore the level and determinants of the natural rate of interest in Japan. To this end, we construct a DSGE model that is specifically designed to address potential drivers of the natural rate that are considered important in previous studies, and estimate the model using Japan's data from 1980 to 2017. Our findings are summarized in the following three points. First, the natural rate has shown a secular decline over time, from 400 basis points in the 1980s, to 30 basis points in the last five years. The decline has been mostly attributed to changes in neutral technology. Changes in investment-specific technology, working-age population, and demand factors have also contributed to the decline, but the quantitative impacts have been small. Second, a secular decline and the quantitative importance of neutral technology are also seen when considering the expected future natural rates over a long horizon, indicating that changes in the natural rate have been perceived as persistent rather than temporal changes over the course of history. Third, in the banking crisis starting in the 1990s, financial factors stood out as an important driver that depressed the natural rate. Their contribution holds second place, after changes in neutral technology, when comparing potential drivers by the size of their contribution to variations in the natural rate. Our results suggest the need to monitor the financial intermediation function, as well as the path of neutral technology when analyzing developments in the natural rate.

JEL classification
E32; E43; E44; E52

Natural Rate of Interest; Monetary Policy Implementation; DSGE Model

The authors would like to thank Kosuke Aoki, Hibiki Ichiue, Takushi Kurozumi, Teppei Nagano, Jouchi Nakajima, Kenji Nishizaki, Masashi Saito, Toshiaki Watanabe, Toshinao Yoshiba, and seminar participants at the Bank of Japan, for their useful comments. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1Monetary Affairs Department, Bank of Japan
  2. *2Monetary Affairs Department, Bank of Japan


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