Non-traditional monetary policies and their effects on the economy

Abstract

The Bank of Japan has implemented bold monetary policy measures with the aim of achieving the inflation target of 2%. As a result, Japan’s economy has improved. However, as the rate of inflation increase is slow, interest rates have not been rising and financial institutions have expressed growing dissatisfaction. Low interest rates are not unique to Japan, but rather a global phenomenon. Although Japan’s past deflationary monetary policy has led to the decline in nominal growth rates, it cannot fully explain the low interest rates. Having analyzed the reasons behind global low interest rates, the reasons are not yet fully understood. Banks in Japan are dissatisfied with low interest rates in Japan. However, banks’ low profitability would be caused by the structural problem that they are accumulating more deposits than they can lend. Moreover, if interest rates were raised, this would lead to an economic downturn, which would not improve banks’ profitability. Because Japan’s economy has improved due to bold monetary easing, it is necessary to maintain the current expansive monetary policy to stimulate increases in prices and interest rates, and to conduct further monetary easing when necessary. Various options for monetary easing measures could be available; this includes the reduction of the interest rate applied to excess reserves.