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The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach *1

April 2005
Nobuyuki Oda*2
Kazuo Ueda*3

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  • *1 This paper is a revised and detailed version of the analysis of which the tentative result was reported in section III. B and the appendix 2 of Baba et al. (2005). The authors are grateful to Hiroshi Kobayashi (Lehman Brothers, Tokyo [formerly at the BOJ]) and Ichiro Muto (BOJ) for their excellent research assistance and discussions. The authors would also like to thank the co-authors of the above-mentioned paper, especially Masaaki Shirakawa and Hiroshi Ugai (BOJ) for their helpful advice and encouragement, as well as other colleagues at the BOJ and the participants at the third BIS annual conference in Brunnen, Switzerland in June 2004 for their helpful comments. All opinions expressed herein are those of the authors and have not been endorsed by the BOJ.
  • *2 Monetary Affairs Department, Bank of Japan. [E-mail:]
  • *3 Professor of Economics, University of Tokyo (formerly, Member of the Policy Board of the Bank of Japan). [E-mail:]


This paper provides an empirical investigation of monetary policy in Japan in the zero interest rate environment that has held sway since 1999. In particular, we focus on the effects of the zero interest rate commitment and of quantitative monetary easing on medium- to long-term interest rates in Japan. In the study we apply a version of the macro-finance approach, involving a combination of estimation of a structural macro-model and calibration of time-variant parameters to the yield curve observed in the market. This enables us to decompose interest rates into expectations and risk premium components and simultaneously to extract the market's perception of the Bank of Japan's (BOJ's) willingness to carry on its zero interest rate policy. In the analysis we make clear the counterfactual policy that would have been practiced in the absence of the actual policies followed by the BOJ since 1999. From this analysis, we tentatively conclude that the BOJ's monetary policy since 1999 has functioned mainly through the zero interest rate commitment, which has led to declines in medium- to long-term interest rates. We also find some evidence that, up until the end of 2003, raising the reserve target may have been perceived as a signal indicating the BOJ's accommodative policy stance although the size of the effect is not large. The portfolio rebalancing effect -- either by the BOJ's supplying ample liquidity or by its purchases of long-term government bonds -- has not been found to be significant.

Zero interest rate policy (ZIRP); Quantitative monetary easing policy (QMEP); Zero interest rate commitment; Policy duration effect; Macro-finance model; Expectations theory; Monetary policy rule

JEL Classification:
E43, E52, E58, G12