Monetary Policy in Japan -- Instruments, Transmission Mechanisms, and Effects (in Japanese)

This paper analyzes instruments and effectiveness of monetary policy, paying attention to the contrast between interest rate policy, which uses short-term interest rates as instruments, and quantitative policy, which uses quantitative measures such as money supply as instruments. In chapters 2 and 3, we investigate the validity of the assumption underlying quantitative policy, namely, stability of money multiplier and of money demand function. Chapter 2 is concerned with money multiplier, which relates monetary base and money supply. In Japan, money multiplier was unstable during the 1990s. We decompose the change in money multiplier into changes in the ratios of reserve to deposit, of currency to deposit. The result shows that very low interest rates induced larger currency holdings, which in turn result in significant decline in money multiplier. We further examine balance sheets of economic agents. It is suggested that money creation process through credit to firms and households became unstable, leading to the instability of money multiplier. Chapter 3 deals with, first, whether long run relationship between money supply and real GDP remained stable during the 1980s. M2+CD, as a whole, is shown to have stable long run relationship with real GDP. However, neither currency nor deposits do not have such stable relationship with real GDP. This means that although M2+CD, as a whole, follows stable long run equilibrium relationship with real GDP, while the composition of M2+CD changes drastically, which results in unstable money multiplier. Next, chapter 3 deals with stability of money demand function by estimating error correction model. Long term interest rates do not affect M2+CD demand, which denies substitution between money and bonds. On the other hand, financial instability after the banking crises of November 1997 greatly affects demand for M2+CD. However, financial instability does not seem to affect demand for currency. Summing up the results in chapters 2 and 3, neither money multiplier nor money demand is stable so that it seems difficult to stabilize real economy through the control of money supply, as quantitative policy assumes. Chapter 4 investigates the question whether "liquidity trap" actually occurred in Japan. If it occurred, neither interest rate policy nor quantitative policy is effective. The result using money demand function shows that while currency demand may have been in the realm of infinite increase, demand for M2+CD have not increased without bound. Therefore, both interest rate policy and quantitative policy could have been effective. Chapters 5 and 6 are concerned with interest rate policy and examine several aspects of transmission mechanism from short-term interest rates to long term interest rates. Chapter 5 estimates the effects of short-term rates on long term rates and forward rates. The result shows that short-term interest rates affect forward rates up to three years, but do not affect longer-term forward rates. This implies that interest rate policy has only a small influence on long-term interest rates. However, if we pick up a period when monetary policy eased more than usually expected, namely spring 1995 with a sharp appreciation of the yen, we find stronger influence on longer forward rates. On the other hand, such a special effect does not show up after the adoption of "zero interest rate policy" in February 1999. Chapter 6 analyzes the sharp increase in the spreads between corporate bond yields and government bonds yields. Just after the banking crises in November 1997, corporate bond yield spread did not react to the increased default probability. However, after the world wide financial crises of August 1998, default probability began to affect corporate bond yield spread. Summing up the results in chapters 5 and 6, transmission from short-term interest rates to long-term rates is not smooth. However, stance of monetary authority can enhance the degree to which short-term rates affects long-tern rates. Chapter 7 constructs structural VAR models in order to investigate the total effects on real economy of monetary policy which uses short term interest rates as policy variables.. Identified monetary policy traditionally adopted by the Bank of Japan seems to have only small effects on output. It accounts only 5% of the variation in real GDP. Lastly, chapter 8 expounds some recent proposals on monetary policy which purport to be effective through private sector's expectations about the future. This kind of proposal is very promising and it is hoped that further research be made in this direction.