Bank of Japan

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BANK OF JAPAN’S MEETING IN MARCH 2006: AN END TO THE QUANTITATIVE EASING POLICY? Japan underwent a decade-long odyssey with deflation and the zero-bound problem. Economic activity in Japan slowed precipitously following the collapse of the socalled bubble economy in December 1989, and Japan began to experience deflation by early 1995. During this initial period, while the economy was slowing, forecasters and policymakers consistently underestimated the extent of Japan’s economic malaise. Consequently, while monetary policy seemed appropriate in terms of the prevailing outlook, the loosening proved woefully inadequate in hindsight. Convinced that Japan’s economic fundamentals were too severely distressed to be rectified with standard monetary policy measures, on March 19, 2001 the Bank of Japan announced a new policy of “quantitative easing”, in an attempt to stimulate the nation’s stagnant economy. Under this policy, the BOJ increased its current account target far beyond the level of commercial bank required reserves. This had the expected impact of reducing the already-low overnight call rate effectively to zero. In addition, the BOJ committed to maintain the policy until the core consumer price index registered “stably” a zero percent or an increase year on year. Such a policy was unprecedented in the history of central banking in any country.

Available Choices and Key Decision
On March 2006, which is five years after the “quantitative easing” policy embarked, the issue concern it was bring back to the desk. The Japanese economy was improving at that time and the core consumer price index (CPI) was showing steady growth after years of deflation, one of the predetermined conditions for lifting the policy. As such there was widespread speculation over the future of the policy. One question arisen: Would the current quantitative easing policy persist or would the BOJ return to a normal monetary stance that targeted interest rates? On March 9th...
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