This paper examines issues surrounding monetary policy under zero interest rates based on one and a half year’s experience in Japan. After reviewing the market development in Japan, it summarizes the transmission mechanism of monetary policy under zero nominal interest rates, and considers what would be the likely policy options if a central bank were to conduct further monetary easing. Specifically, a more detailed policy announcement is regarded as feasible, less costly, and the less risky option, although additional effects of monetary easing through this measure are relatively limited. On the other hand, introduction of a temporary fixed exchange rate system and a huge increase in the outright purchase of medium- and long-term government bonds can induce relatively large effects, although the uncertainty in the effects as well as the accompanied costs and risks may be very large.
In addition, the paper considers the validity of introducing inflation targeting. It summarizes that inflation targeting is not necessarily easy to distinguish from traditional policy management based on an overall consideration. Furthermore, given recent tendencies in Japan, the paper argues that the introduction of inflation targeting in the current situation might impair the conduct of monetary policy in the absence of preconditions for benefiting from its intrinsic merits.
Keywords: Monetary policy; Zero interest rate; Long-term interest rate; Market operation of outright purchase of long-term government bonds; Foreign exchange market intervention; Inflation targeting
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.