Non-Traditional Monetary Polices: G7 Central Banks during 2007-2009 and the Bank of Japan during 1998-2006

Abstract

This paper offers a brief summary of non-traditional monetary policy measures currently adopted by G7 central banks and their provisional evaluation in the light of the Bank of Japan (BOJ)'s experience during the period of 1998-2006. The paper points out that although unprecedented measures seem to have been adopted by major central banks since 2007, many of them have been tried in one way or another in earlier episodes of financial crises, especially by the BOJ during 1998-2006 and are in this sense not new. We summarize the BOJ's and G7 central banks' policies based on a typology of policies that can be used even when interest rates are very low. Non-traditional policy measures can be classified into managing interest rate expectations, targeted asset purchases and quantitative easing, all of which were used by the BOJ. The so-called credit easing can be considered to be a part of targeted asset purchases. In the current episode, targeted asset purchases or credit easing has been employed by most central banks, while expectations management and (strong forms of) quantitative easing have not been widely used. We explore reasons for such a choice of policy strategy in the current period. In addition, some important lessons can be learned about the effectiveness of non-traditional policies from what the BOJ and the Japanese government did and did not do during the early to mid 1990s and its ultimate failure to avoid deflation.