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Effectiveness of Window Guidance and Financial Environment

In Light of Japan's Experience of Financial Liberalization and a Bubble Economy

August 2010
Tomoyuki Fukumoto, Masato Higashi, Yasunari Inamura, Takeshi Kimura
International Department

Window guidance is considered an important instrument of monetary policy by Chinese monetary authorities. Since the middle of 2009, window guidance has been strengthened in response to their fast growing economy and rising real estate prices, leading to the current slowdown in loan growth. Although evidence of the recent policy of window guidance has demonstrated its effectiveness, this may be because financial intermediary channels not subject to the control of window guidance are yet to be established in China. While window guidance in Japan similarly played a major role in monetary policy in the past, financial liberalization in the 1980s gradually undermined its effectiveness because liberalization led to the expansion of various financial intermediary channels unrestrained by window guidance. The effectiveness of the Japanese window guidance was further reduced by the low official discount rate, a monetary policy rate at that time, throughout the late 1980s. Since China is expected to see steady progress in its financial market infrastructure and financial liberalization, the historical transition of the role and effectiveness of the Japanese window guidance seems to offer a certain lesson to its neighboring country: progress in financial liberalization erodes the validity of window guidance over time and makes interest rate policy more important as a monetary policy instrument.


Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2010-E-4, is a translation of the original Japanese version, 2010-J-10 published in June 2010. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments and questions as well as requests for hard copies, please contact Tomoyuki Fukumoto, Associate Director-General, International Department (E-mail: