Essay O 1173268

Submitted By Katiepush
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Pages: 13

Performance of the Monetary Policy in Japan

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Total Number of Words: 2,251

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Introduction
Japan is known for being the world’s 5th biggest importer and exporter (EW World
Economy Team, 2013). However, several news reports highlighted the fact that the economic growth of advanced economies like Japan was badly affected by the global financial and economic recession that has occurred between 2008 to 2011 (Rasmus, 2013). As a result, Japan’s annual GDP growth rate fell from 2.2% in 2007 down to -1.0% and -5.5% in 2008 and 2009 respectively (The World Bank, 2014c).
In general, either monetary or fiscal policies can be used to prevent a slow economic growth (Rasmus, 2013). Considering the economic development of Japan, this study will focus on analyzing the monetary policy framework that Japan has adopted to improve its economic situation. To give the readers a better understanding of this subject matter, Japan’s monetary policy framework will first be tackled in details. Right after discussing the measures taken by the
Bank of Japan in dealing with the global recession, this study will focus on critically analyzing its effectiveness in terms of preventing economic stagnation or economic crash.
Japan’s Monetary Policy Framework
The economic term ‘price stability’ means that the market prices of goods and services are free from sudden and uncontrollable fluctuations (Bank of Japan, 2013). In general, having strong price and financial stability is necessary to ensure that deflation would end (Kramer and
Stone, 2005). To make Japan’s economic activities have a strong foundation, the Bank of Japan has decided to focus its monetary policies on maintaining price stability at 2% year-to-year change in its consumer price index (CPI) (Bank of Japan, 2014a; Bank of Japan, 2013).
The Bank of Japan has also been using the interest rates strategy as their way of controlling its monetary currency (Kramer and Stone, 2005). To ensure that the members of the
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monetary policy board are able to make important decisions, the Bank of Japan requires all board members to attend its Monetary Policy Meetings (MPMs) (Bank of Japan, 2014a). Often times, it is through these meetings, that the board members are able to discuss the on-going economic and financial situation (Blinder et al., 2001).
For example, in exchange of collateral, the Bank of Japan purposely extends some form of loans to the affected financial institutions in times of serious financial crisis (Bank of Japan,
2014a). As a common knowledge, there will always be a domino effect between banking or financial failure and the socio-economic situation in each country. Therefore, in the process of extending loans, the Bank of Japan can help prevent the long-term socio-economic consequences caused by a serious financial depression (Bank of Japan, 2014a). Other than extending some loans to financial institutions, the Bank of Japan also has the option to issue and sell bills to the affected parties (Bank of Japan, 2014a).
Measures Taken by the Bank of Japan
In response to the global recession, the Bank of Japan immediately conducted MPM on the 22nd of January 2008. Since May 2007, the Bank of Japan has implemented its zero-interest policy (Masaru, 2007). Instead of its using zero-interest rate policy, the Bank of Japan decided to increase the uncollaterized overnight call rate at 0.5% between the 22 nd of January 2008 up to the
20th of November 2008 (Bank of Japan, 2008a; Bank of Japan, 2008f). On the 21st of November
2008, the Bank of Japan decided to decrease its uncollaterized overnight call rate down to 0.3%
(Bank of Japan, 2008f). On the 19th of December 2008, the Bank of Japan decided to reduce its uncollaterized overnight call rate down to 0.1% (Bank of Japan, 2008g).
As explained by BOJ Governor Fukui Toshihiko, the main reason for increasing the uncollaterized overnight call rate at 0.5% is to avoid misallocation of the economic…