Trying to Make Sense of the Bank of Japan's Monetary Policy since the Exit from Quantitative Easing

In this short note, I review the Bank of Japan (BOJ)'s monetary policy since its exit from the so‐called quantitative easing regime early in 2006. The major characteristic of the policy stance during the period, called Strategy 2 below, has been to adjust the policy interest rate gradually upward in response to a healthy real economy despite stagnant behaviour in consumer prices. Such a policy stance can be contrasted with a hypothetical strategy, Strategy 1, whereby the BOJ would have kept the policy rate at lower levels, possibly at 0%, until inflation starts to show an upward trend more clearly. The two strategies are compared on many fronts with particular attention to well‐known recent empirical regularities about inflation – a smaller response of inflation to output and larger uncertainties about the response. Various comparisons of the two strategies offered here, although far from conclusive, tend to support Strategy 1 over Strategy 2. In my discussion of the two strategies, I also comment on some of the major features of the Nishimura article in this issue.