te policy aims at exerting further downward pressure on interest rates across the entire yield curve by pushing down the short end of the yield curve, in combination with large-scale purchases of JGBs. Thereafter, in September 2016, the Bank conducted a comprehensive assessment on developments in economic activity and prices as well as policy effects since the introduction of QQE; based on the findings, the Bank introduced yield curve control, which focuses on long-term interest rates in addition to short-term interest rates as the operating target. However, the basic approach of lowering nominal interest rates across the entire yield curve and lowering real interest rates by raising inflation expectations has remained unchanged.
In modern central banking, QQE is classified as unconventional monetary policy, but from a somewhat longer-term perspective, it can be said to be a contemporary application of Hawtrey’s theory on the importance of guiding expectations and Keynes’ theory that monetary easing can be conducted through the purchase of long-term government bonds. An old East Asian proverb –“visiting old, learn new”– says that one can derive new understanding from learning the lessons of the past, and I think this is particularly apt with regard to the intellectual journey leading up to QQE.
In practice, QQE has produced its intended effects. Inflation expectations climbed notably after the introduction of QQE. This demonstrates that a strong determination by the central bank pushes up people’s forward-looking inflation expectations. In addition, the large-scale purchases of JGBsas part of QQE have exerted downward pressure on nominal interest rates across the entire yield curve. As a result, the Bank of Japan has succeeded in reducing real interest rates to levels well below the natural rate of interest for the first time in its two-decade long battle with the zero lower bound on the short-term policy interest rate (Chart 7).
These monetary easing effects have stimulated economic activity both in the corporate and household sectors, and the output gap has improved substantially. Corporate profits are at record highs. The unemployment rate has fallen to less than 3 percent, meaning that Japan has almost achieved full employment (Chart 8). Wages are rising moderately with the tightening of labor market conditions. An especially noteworthy change is that the practice of regular increases in base pay, which had disappeared during the prolonged deflation since the second half of the 1990s, has returned and has now been observed for the fourth consecutive year. A virtuous cycle between rising inflation and wage increases has been operating. In other words, Japan is no longer experiencing deflation in the sense of a sustained decline in prices.
to be continued