Financial liberalization, which had started progressively in Japan during the 1970s, accelerated in the 1980s. The move towards greater freedom in financial transactions and the increased scope for the working of market forces have had, and are likely to have, significant implications for the conduct of monetary policy. These are main issues addressed in this paper which is divided in three parts. Part I of the paper briefly reviews the conduct of monetary policy in the postwar period when the Japanese financial system was based on a wide of regulations. It also provides a succinct account of the process of financial liberalization in the 1970s and 1980s. Part II discusses a set of issues concerning the working of monetary policy in the new financial environment. Part III offers a brief assessment of the costs and benefits of financial liberalization and identifies major areas for consideration in the authorities' efforts to improve the Japanese financial system further.
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.