The Role of the Central Bank under the Japanese Financial Crisis: Zero Interest Rate, Quantitative Easing, and Credit Easing

Abstract

Under the financial turbulence, the Bank of Japan (BOJ) had launched a series of unprecedented monetary policies in the late 1990s and the early 2000s. The conventional monetary policies were not effective under liquidity trap. However, some unconventional monetary policies, including zero interest rate, quantitative easing, and credit easing, had important roles in stabilizing the economy. The first is to stabilize long-run expectations through the BOJ fs commitment that the policy will continue until deflationary concerns disappear. The second is to maintain the proper functioning of the market so as to avoid disturbance in the short-term money market. The latter part of this paper shows that the second element was successful in stabilizing the short-term money market in Japan in the early 2000s. The credit easing policy was more powerful tool in providing ample liquidity under the Japanese Financial Crisis. However, the unconventional monetary policies caused a variety of moral hazards in the markets.We show that the extreme monetary policy was useful in improving macroeconomic performance with some nonnegligible costs.