Abstract

Monetary Policy in Japan. A Review of its Conduct During the Past Ten Years

This article reviews the conduct of monetary policy in Japan over the past ten years. During this period, in contrast to the preceding decade when the major objective of monetary policy was restraint of excessive economic expansion and correction of balance-of-payments deficits and when credit rationing was the main mechanism of monetary restraint, a number of important changes in the behaviour of the Japanese economy called for the modification of the framework for monetary management. The first of such changes was the emergence of the public sector as a large net borrower in the financial market. The second was the growing importance of external influences on domestic monetary developments as a result of the increased integration of the Japanese economy with those of other countries. The third was a weakening of autonomous demand after the termination of the period of high economic growth when underlying demand pressure remained strong. In the light of these changes, the Bank of Japan made various attempts to adapt the technique of monetary management and policy instruments to the new situation. More recently, efforts have been strengthened to liberalise interest rates, so that they should play a larger role in the allocation of funds to both the public and private sectors. In 1978, the Bank of Japan introduced a new practice of publishing the projected growth rate of M₂ during the current quarter in the hope that it will help deepen the general public’s understanding about the importance of the money supply. For the Bank of Japan, the proper control of the money supply will continue to remain an important task in its efforts to achieve price stability, while attaining a reasonably high rate of economic growth and promoting balance-of-payments adjustment.