Japanese monetary policy has not only been effective over the past 15 years; it has also
operated in a remarkably similar way to US monetary policy. As Yuzo Honda and
Yoshihiro Kuroki note in a new study of the Bank of Japan’s policy actions since 1989,
this is particularly surprising given Japan’s long period of economic stagnation and the
significant institutional differences between the two countries, notably the greater role
played by banks and government financial institutions in Japan.
Their article, which is published in the July 2006 issue of the Economic Journal, provides a
detailed and well documented list of the Bank of Japan's policy actions since 1989. Since
the Bank has not always been completely transparent about the desired setting of its policy
instrument, such a precise chronology has not previously been available.
The study then goes on to estimate financial market responses – reflected in both the term
structure of interest rates and share prices – to surprise changes in the call rate for the
Japanese economy, the target rate set by the central bank.
After the bubble burst in 1990, the Japanese economy entered a decade-long period of
deflation. Deflation has been rare in advanced economies in the post-war period, but has
attracted much attention from macroeconomists. In particular, there has been controversy
about the effectiveness of monetary policy among economists and central bankers in Japan
and other countries. But until now, there has been little empirical evidence about the
efficacy of monetary policy.
This research shows empirically that changes in the call rate are effectively transmitted to
long-term market interest rates. In particular, even the ten-year market rate responds
significantly to the surprise component of changes in the call rate.
Share prices are also statistically significantly affected by surprise changes in the call rate
target. The study finds that a surprise 1% cut in the call-rate target was associated with an
increase of roughly 3% in the level of stock prices between July 1989 and March 2001.
In short, there were no problems with the initial aspect of the transmission mechanism of
monetary policy for the Japanese economy in this period. Moreover, these findings for the
Japanese economy are broadly consistent with the findings of several researchers
(including US Fed chairman Ben Bernanke) for the US economy.
This consistency is rather surprising given the significant institutional differences between
Japan and the United States. In general, banks in Japan play a greater role than their US
counterparts. Government financial institutions, including postal savings, also have a
greater role in Japan.
In addition, central banks implement monetary policy differently. Moreover, the period is
unusual because it covers Japan's most serious stagnation in the post-war era.
ENDS
Notes for editors: ‘Financial and Capital Markets' Responses to Changes in the Central
Bank's Target Interest Rate: The Case of Japan’ by Yuzo Honda and Yoshihiro Kuroki is
published in the July 2006 issue of the Economic Journal.
Honda is at Osaka University. Kuroki is at Chuo University.
For further information: contact Yuzo Honda via email: honda@econ.osaka-u.ac.jp;
Yoshihiro Kuroki via email: beewood@tamacc.chuo-u.ac.jp; or Romesh Vaitilingam on
0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).