Abstract Three decades of monetary easing combined with chronic fiscal deficits and debt accumulation have severely narrowed the Bank of Japan’s policy room. The article argues that the Bank of Japan is constrained by three channels: government bond markets, stock markets, and excess reserves. Monetary tightening would not only destabilize the financing of the government, financial institutions as well as households but also expose the Bank of Japan to institutional risks. By contrast, monetary easing fuels yen depreciation and inflation. The Bank of Japan is caught between institutional instability of the central bank, financial instability of the domestic economy and currency instability of the Japanese yen, offering a warning for other central banks issuing fiat-currencies.
Taiki Murai (Thu,) studied this question.
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