Japan’s monetary policy in a challenging environment

The Bank of Japan (BOJ) is attempting to overcome the mild deflation that has lasted in Japan for nearly 15 years and to achieve its 2 % price stability target. In the face of the zero lower bound on short-term interest rates, the BOJ introduced nonstandard monetary easing policy called quantitative and qualitative monetary easing (QQE) to achieve the target. So far, a number of positive outcomes have materialized. Compared with 2012, stock prices have been higher; private consumption is more resilient; more active real estate investment are taking place; and the yen’s exchange rate has been at more depreciated levels. Most importantly, the growth momentum of the economy is gaining traction and the unemployment rate is approaching the pre-crisis lowest level. There are some signs of the economy moving out of deflation although the BOJ needs some time to reach the 2 % target. This paper highlights the main features of QQE with conceptual explanations by reviewing the previous major monetary easing policies: quantitative monetary easing adopted in 2001–2006 and comprehensive monetary easing introduced in 2010 but was replaced with QQE in April 2013.