Japan's Monetary Policy: A Literature Review and Empirical Assessment

Although various studies examine how monetary policy affects the economy using real-world data, a consensus has yet to be reached. This study reviews and assesses the monetary policy implemented by the Bank of Japan, focusing on policies that employ short-term interest rate as the operational target. Our review of empirical studies on monetary policy that influenced the policy of the Bank of Japan prior to and during the 1980s reveals that the studies focused on (1) bank behavior, (2) the interest rate mechanism, (3) financial deregulation and monetary aggregates, and (4) the systematic reaction regarding the achievement of the ultimate goal. Our empirical results on the causal effect of monetary policy in the framework of a structural vector autoregressive model attest to the significant impact of Japan’s monetary policy on the financial market and macroeconomy from the 1980s onward. Our counterfactual simulations affirm that the central bank should consistently shift its policy stance to achieve macroeconomic stability. Moreover, even tiny policy rate cuts in a low-interest-rate environment make significant contributions to economic recovery.