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Monetary Policy Under the Zero Interest Rate Constraint and Balance Sheet Adjustment

May 2001
Bank of Japan
Masaaki Shirakawa1
Advisor to the Governor

Click on ron0106a.pdf (134KB) to download the full text.

There are two contrasting evaluations of the conduct of Japan's monetary policy since the early 1990s. One is that monetary policy has not been easy enough to promote economic recovery in Japan. The other is that since monetary policy has already been substantially eased, further easing would not contribute to economic recovery, but would rather delay the progress of structural reform that is a prerequisite for sustainable economic growth. With these evaluations in mind, this paper examines the effect of monetary policy in general and the effect of so-called 'quantitative easing' in particular when nominal short-term interest rates are zero and balance sheet adjustment is in progress.

  1. This is an English translation of a Japanese paper included in the forthcoming issue of "Economics" (end-May 2001, Toyo-Keizai Shinpou-sha). It is the same as the original Japanese version except that it incorporates additional data released after the submission of the Japanese draft as well as some extra explanations for the benefit of foreign readers. Views expressed in this paper are those of the author and do not reflect those of the Bank of Japan.