For most of the time since 1995, the Japanese price level has declined. Since early 1999, short-term interest rates have mostly remained near zero. Also, starting in 2001, the excess reserves held by banks have risen dramatically. Many observers have concluded that central banks are powerless to end deflation when short-term interest rates are near zero. This paper argues that such a pessimistic conclusion is unwarranted.
Keywords: Japanese monetary policy; Bank of Japan; Deflation; Liquidity trap
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.