With one of the world’s lowest inflation records the Bank of Japan (BOJ) has obviously achieved an outstanding job in terms of price stability, its major objective. But what about its other objectives, especially the promotion of stable economic growth? One decade of financial crisis, stagnant growth, deflationary pressures, and exchange rate appreciation led many observers to the conclusion that the BOJ might have been so determined to fight inflation that it was unable to equilibrate its competing goals in a sensitive way.

To find a partial answer on this question we carried out a simple historical experiment: first, we fitted variations of (Taylor-type) bivariate inflation and real demand objective functions to the call rate, the central policy instrument of the BOJ. Then, we used the derived function as a standard for “normal” policy decisions at the BOJ, and investigated the phases when its actual policy deviated “discretionarily.” In line with many earlier studies, we found that the BOJ policy of the last two decades is quite well described by an inflation targeting, interest rate smoothing reaction function. Our results let us suspect, however, that the BOJ had an even stronger emphasis on “pure” inflation fighting than earlier studies revealed, and that the rare episodes of “discretionary” policy decisions might not have contributed to the sound development of the Japanese economy.

Full text: Monetary Policy at the Bank of Japan - Pure Inflation Fighting?