01/02/2000

Limitations of Monetary Policy- Three Considerations Regarding the Zero Interest Rate Policy-

Hideya Kubo 

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1.Introduction

The new Bank of Japan Law has given Policy Board members greater freedom of expression.Having already focused on driving down interest rates close to zero, and with the money supplypolicy transmission route damaged, the central bank's new efforts to explain its policiesand encourage dialogue are a good sign.

But on the key matter of future monetary policy, most of the board members have publiclycriticized quantitative easing without elaborating further. While there may be a need to monitorthe economy and watch for the effects of monetary policy, how will the central bank reactto an exchange rate or other external shock that could debilitate the economy? To preventunnecessary expectations and conjecture about the next monetary policy, three aspects ofmonetary policy need to be examined.

First, we must clarify the confusion surrounding the definition and impact of quantitative eas-ing.Second is the issue of compatibility between the central bank's monetary policy and politicallyinfluenced fiscal policy, especially since public will ultimately bear the full impact, riskand cost of these economic policies. And third, we examine how to assess the BOJ balancesheet in light of discussions on how it may be affected by various policy proposals.

Hideya Kubo

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