The Role and Effect of Monetary Policy in Japan

A central bank is asked with managing public liquidity to keep inflation low and stable and to stimulate an economy’s business cycle. In Japan, monetary policy has been implemented by the Bank of Japan (BoJ) with the aim of maintaining price stability. However, there have been disruptive effects due to the past implementation of monetary policy in response to shocks related to financial crises and bursting economic bubbles. In this paper, we introduce some economic thoughts and philosophies regarding monetary policy such as monetarist concepts to evaluate the effects of political implementations by the BoJ. We also summarize historical approaches and the BoJ’s monetary policy philosophy. Based on a report by the BoJ (2002), the effects of policy implementations from 1994 to 2019 are analyzed empirically to determine the relationship between the monetary base and real economic indicators.