Japan’s monetary policy: a literature review and empirical assessment

This study reviews and assesses the monetary policy implemented by the Bank of Japan (BOJ), focusing on policies that employ short-term interest rates as the operational target. Our review of empirical studies on monetary policy that influenced the BOJ's policy reveals that they focused on (1) banking system and interest rate mechanisms, (2) financial dereg-ulation and monetary aggregates, (3) the systematic reaction regarding the achievement of the ultimate goal, and (4) confirming how certain evidence serves as material for policy judgments and communication with the public. 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. Even small policy rate cuts in a low-interest-rate environment make significant contributions to economic recovery.