MONETARY POLICY OF JAPAN 1990-2022

1. Tổng quan nền kinh tế Nhật Bản 1990-2022(My)

- 1990-2000
The Japanese economy experienced a period of stagnation that lasted throughout
the 1990s, known as the lost decade. After the asset bubble burst in 1990-1991,
Japan's economic growth slowed down. On average annually throughout the
1990s, Japan's real gross domestic product and gross national product per capita
grew by only 0.5%, lower than most other advanced industrial countries.
Unemployment rate increases rapidly year by year.

Japan's average annual real GDP growth over the decade is lower than in previous
periods.

Some of the main causes of Japan's economic downturn in the 1990s were:
• Reduced labor productivity due to ineffective support policies for businesses
and unreasonable allocation of resources among sectors.
• Reduction of working hours due to the Labor Standards Law of Japan which
came into effect from fiscal year 1988.
• Debts (including bad debts and bad debts) have damaged the Japanese economy
by making the distribution of resources distorted. Banks often have a debt
rescheduling policy for customers who are unable to pay their debts, causing
inefficient businesses to continue operating and occupying capital.
- 2000 - 2010:
The Japanese economy in the year 2000 - 2010 experienced many fluctuations
and challenges due to the impact of the economic crisis in 1990, which caused a
prolonged economic recession, high public debt, low inflation, and low exports.
imports decreased. To revive the economy, successive Japanese governments
have taken measures such as:
• Resolving bad debts of banks and businesses by writing off debts,
merging and acquiring loss-making financial institutions
• Implement economic stimulus programs by public spending, lowering
interest rates and applying loose monetary policy
• Promote structural economic reform by cutting public spending,
improving labor market efficiency, encouraging investment in research and
development, and expanding free trade with international partners
However, the Japanese economy also faces other difficulties and risks:
• The global financial crisis in 2008-2009, caused the Japanese economy to
shrink by 5.4% in 2009, exports decreased by 24.9%, imports decreased by
31.7% and inflation decreased by 1. 3%.
• East Japan earthquake and tsunami in 2011, causing great damage to
people and property, disrupting supply chains and industrial production,
causing nuclear and environmental safety problems.
- 2010 - 2019:
• Japan's economy had a strong recovery after the global financial crisis in
2008 and 2009, thanks to the fiscal and monetary stimulus measures by the
Japanese government and central bank, which were called Abenomics.
• Japan's economy achieved an average GDP growth rate of about 1.5% per
year between 2010 and 2019, higher than the average growth rate of G7
countries (1.2%).
• Japan's economy has had a strong recovery after the global financial crisis
in 2008 and 2009, thanks to monetary and fiscal stimulus measures by the
Japanese government and central bank, which were called Abenomics.
• Japan's economy achieved an average GDP growth rate of about 1.5% per
year between 2010 and 2019, higher than the average growth rate of G7
countries (1.2%).
Japan's GDP grew from $4.4 trillion in 2010 to $5.1 trillion in 2019,
reaching an all-time high of $6.3 trillion in 20122. Abenomics consists of
three arrows: monetary easing currency, stimulating public spending and
structural reforms. The objective of this policy is to reverse low inflation,
economic growth and improve the balance of trade
 - 2019 - 2022:
The Japanese economy from 2019 to now has been a period of many difficulties
and challenges due to the impact of the Covid-19 epidemic, trade tensions and
regional security. According to Forbes, Japan's GDP will contract by 4.7% in
2020 due to a decline in exports, tourism and domestic spending. Japan also faces
problems such as low inflation, high public debt and an aging population. In
2021, Japan has made efforts to revive the economy, such as launching a
vaccination program, stimulating public and private spending, hosting the Tokyo
Olympics and changing political leadership3. However, Japan also faces external
risks and uncertainties, such as the imposition of trade protectionist measures by
the United States, China's increased military activity in the East and South China
Seas, and North Korea. Tien continues to launch missiles and develop nuclear
weapons1. In 2022, Japan needs to solve these problems to maintain the stability
and growth of the economy.

2. Chính sách tiền tệ của Nhật Bản 1990-2022(An, Châu)

● Bursting of the Bubble Economy (1990s)

The bursting of the bubble economy in Japan refers to the collapse of Japan's
economic bubble in the early 1990s. The bubble economy was a period of rapid
economic growth and soaring asset prices, primarily in real estate and stocks,
fueled by excessive speculation and loose monetary policies.

During the 1980s, Japan experienced a period of rapid economic expansion,

driven by factors such as low interest rates, easy access to credit, and
speculative investing. Real estate and stock prices soared to unprecedented
levels, creating a perception of wealth and prosperity.

However, the bubble began to deflate in the late 1980s and eventually burst in
the early 1990s. Several factors contributed to the collapse:

1. Overvaluation of Assets: Asset prices, particularly real estate and stocks,

became significantly overvalued. As speculation grew and investors
rushed to buy assets, prices detached from their underlying fundamentals.
When the bubble burst, asset prices plummeted, leaving investors with
enormous losses.
2. Excessive Debt: Individuals and corporations took on massive amounts of
debt during the bubble period, often using real estate as collateral. When
 asset prices collapsed, the value of collateral plummeted, leading to
financial distress and bankruptcies.
3. Banking Crisis: Japanese banks had heavily invested in speculative real
estate and stock market ventures. As asset prices declined, banks were
left with massive amounts of non-performing loans. The resulting
banking crisis weakened the financial sector and constrained lending,
further exacerbating the economic downturn.
4. Economic Stagnation: The bursting of the bubble triggered a prolonged
period of economic stagnation, deflation, and recession in Japan.
Business investment declined, consumer spending weakened, and
unemployment increased. The government struggled to stimulate
economic growth and faced challenges in implementing effective policy
responses.

The consequences of the bursting of the bubble economy had long-lasting

effects on the Japanese economy. Japan experienced what is often referred to as
the "Lost Decade" or the "Lost Two Decades" of stagnant economic growth and
deflationary pressures. The government implemented various measures to
address the crisis, including financial sector reforms and stimulus packages, but
it took years for the economy to recover.

It's worth noting that the bursting of the bubble economy and its aftermath have
been extensively studied and analyzed by economists and policymakers
worldwide. The lessons learned from Japan's experience have influenced
economic thinking and policy decisions in other countries facing similar
challenges.

● Zero Interest Rate Policy (ZIRP)

In February 1999, the BoJ introduced its Zero Interest Rate Policy (ZIRP) by
lowering the policy rate “as low as possible.” In addition, the Bank later
announced that the ZIRP would continue until deflationary concern

By August 2000, the BoJ judged that current economic conditions had improved
enough to exit ZIRP and raised the overnight call rate into positive territory.
This normalization effort, however, occurred despite a less than favorable
outlook (see text figure) and appears to have been premature.

● Quantitative Easing (QE) (2000s):

In early 2001, as the economy weakened substantially, the BoJ decided to

re-instate ZIRP and reinforce it with the new policy initiative labeled
Quantitative Easing Policy (QEP). The new policy strategy entailed a change in
policy instrument—from the short-term rate to quantity of reserves—and
purchases of long-term JGBs to increase the monetary base. To convince
markets that the policy would be maintained, the Board committed to maintain
ZIRP until core inflation became stably above zero or recorded an increase year
on year.

In early 2006, economic growth had recovered, inflation was rising, and
financial and corporate sectors were in the best shape in over a decade.10
Moreover, the legacy problem of nonperforming loans, which had hampered
financial intermediation, was largely resolved. Hence, in March 2006, the BoJ
judged that the conditions for exiting QEP had been met and re-introduced the
overnight interest rate as the main policy tool. However, similar to the 2000
episode, the BoJ’s economic forecast published around the time of the decision
did not seem to indicate a strong case for normalization. Specifically, the BoJ
projected the two-year-ahead core inflation at slightly below one percent, and
according to the minutes from the policy meeting on March 9, 2006, many
Board members judged that the output gap was only gradually narrowing and
that unit labor costs were facing weakening downward pressures.

● Abenomics and "Three Arrows" Strategy (2012)

Abenomics is an economic policy package introduced by Shinzo Abe, the

former Prime Minister of Japan, in 2012. The term "Abenomics" is a
combination of "Abe" and "economics." The policy aimed to revitalize the
Japanese economy, which had been facing decades of low growth and deflation.

Abenomics was based on the "Three Arrows" strategy, which consisted of three
main components:
 1. Monetary Policy: The first arrow focused on aggressive monetary easing
by the Bank of Japan (BOJ). The BOJ implemented measures to increase
the money supply, such as buying government bonds and other assets.
The goal was to combat deflation, increase inflation expectations, and
encourage borrowing and spending.
2. Fiscal Policy: The second arrow aimed to implement expansionary fiscal
policy. The government introduced large-scale fiscal stimulus packages,
including public infrastructure projects and increased government
spending, to boost economic activity. These measures were intended to
create jobs, increase consumer spending, and stimulate growth.
3. Structural Reforms: The third arrow targeted long-term structural changes
in the Japanese economy to promote sustainable growth. It included
initiatives to improve productivity, encourage innovation, promote
entrepreneurship, and deregulate certain sectors. Structural reforms were
aimed at making the Japanese economy more competitive and flexible.

The Three Arrows strategy was designed to work in a coordinated manner, with
each arrow supporting and reinforcing the others. The goal was to create a
positive feedback loop where monetary easing and fiscal stimulus would
generate economic growth, leading to increased tax revenue and reduced public
debt.

While Abenomics initially showed some positive results, such as boosting stock
prices and weakening the yen, it faced challenges in achieving its long-term
goals. The policy faced difficulties in achieving sustained inflation and
generating significant wage growth. Structural reforms, including labor market
and regulatory changes, progressed slowly.

● Quantitative and Qualitative Easing (QQE) (2013)

Although the Bank continued to provide accommodative financial conditions

through measures such as an expansion of the Asset Purchase Program and
strengthening of forward guidance, this did not result in a significant
improvement in economic activity and prices. Thus, the Bank newly introduced
an extremely powerful policy package in April 2013 — namely, QQE. Under
this framework, the Bank shifted the main operating target from interest rates to
the monetary base, and incorporated all of the four approaches that I outlined
earlier. First, it encouraged a decline in long-term interest rates more powerfully
than before through large-scale JGB purchases of which the amount far
exceeded that under the comprehensive monetary easing policy. Second, the
purchase amount of assets, such as ETFs, was expanded substantially, thereby
significantly strengthening the effects on risk premiums. Third, while this was
introduced at a later date, in January 2016, with reference to measures taken by
central banks in Europe, the zero lower bound itself was removed and a
negative interest rate of minus 0.1 percent was applied to a portion of the Bank’s
current account balances. Fourth, the Bank aimed to drastically change people’s
expectations and thereby increase inflation expectations, by making a strong and
clear commitment to achieving the price stability target of 2 percent. This
commitment also was underpinned by the change in the main operating target to
the monetary base and the announcement of its large-scale expansion.

QQE has produced remarkable effects. Through the large-scale purchases of

10-year JGBs and a rise in inflation expectations, the Bank 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 5). As a result, Japan’s economy has
improved significantly over the past four and a half years (Chart 6). As the
output gap improved steadily, corporate profits have been at historically high
levels and the labor market is very tight, at virtually full employment. Wages
have increased steadily, albeit at a moderate pace. On the price front, the
year-on-year rate of change in the CPI excluding fresh food and energy has been
positive as a trend for about four years. This is the first time since the end of the
1990s that such positive developments are being observed in Japan. We judge
that the economy is no longer in deflation, which is generally defined as a
sustained decline in prices.
 ● Negative Interest Rate Policy (NIRP) (2016)

Despite the scale-up of QQE, domestic growth weakened further in 2015, and
inflation continued to fall (Figure 1). Moreover, concerns were emerging that
the BoJ would soon run out of JGBs to purchase and that options to further
stimulate the economy were limited. To dispel these concerns, the BoJ surprised
market participants in early 2016 by introducing its Negative Interest Rate
Policy (NIRP). The interest rate on excess reserves was lowered into negative
territory with the intention to put downward pressure on short-term interest rates
and raise inflation expectations by re-confirming the Bank’s commitment to
achieving the inflation target.

However, the impact on yields was larger than anticipated, leading to a

significant flattening of the yield curve (see text figure). The large compression
of term spreads triggered worries about financial sector side-effects (i.e.,
increased risk taking and further decline in profitability of financial institutions).
Moreover, rising global growth concerns and financial stability concerns during
the first half of 2016 led to lower stock prices, continued yen appreciation, weak
credit demand, and persistent doubts about the BoJ’s ability to reflate the
economy.

● Yield Curve Control (YCC) (2016)

To support the new reflation strategy, the BoJ implemented a new operational
framework labeled Yield Curve Control (YCC). The objective of YCC was to
shape the yield curve by targeting both the short-term interest rate (NIRP) and
the long-term interest rate (10-year JGB yield). By buying JGBs along the entire
yield curve, the BoJ would be able to prevent the long end of the curve from
falling while keeping the short end unchanged. This would make monetary
accommodation more sustainable since lending rates are benchmarked to short-
to medium-term interest rates, while the profitability of financial institutions
such as pension funds and insurers is influenced by long-term term spreads.14
Moreover, the YCC would allow the BoJ to reduce JGB purchases and hence
address concerns that it was running out of JGBs to buy.

Macroeconomic outcomes improved somewhat under YCC between 2016 and

2020. Economic growth averaged above potential and core inflation appeared to
have stabilized at slightly below one percent. Moreover, the yield curve
steepened compared to the levels seen right before the implementation of YCC,
and the BoJ’s purchases of JGBs fell markedly. However, little progress was
made in terms of permanently lifting inflation expectations.
 ● COVID-19 Response

In spring of 2020, global economic activity took a severe hit as the COVID-19
pandemic spread across the world. The BoJ responded with continued monetary
accommodation and expanded support to finance firms and maintain stability in
financial markets. The Bank adopted measures to maintain the smooth
functioning of financial markets and incentivize the provision of credit. These
measures included an expansion of asset purchase schemes such as JGBs,
commercial paper and corporate bonds, exchange-traded funds, scaling-up of
special funds-supplying operations to facilitate financing of corporates, and the
enhancement of U.S. dollar liquidity provision with five other major central
banks.

3. Tích cực và hạn chế của chính sách tiền tệ (Two Sides of Easy Monetary Policy in
Japan) (Châu)
Over the last 20 years, the Bank of Japan (BOJ) has come up with a series of
unconventional monetary policy measures to fight against the country’s prolonged
deflation. These include the Zero Interest Rate Policy in 1999, the Quantitative Easing
(QE) policy in 2001 to increase money supply to financial markets, the Quantitative and
Qualitative Monetary Easing (QQE) policy in 2013 that doubled the monetary base, and
the Negative Interest Rate Policy (NIRP) in 2016. The latest move was to upgrade the
QQE and NIRP with the introduction of the QQE with Yield Curve Control (YCC) in
late 2016, which is targeted not only at maintaining the short-term policy rate at -0.1
percent but also to maintain 10-year JGB interest rates at around 0 percent. These
innovative policy measures have earned the BOJ the reputation as one of the most
pioneering central banks in the world.

Let’s take a closer look into the effectiveness of the latest innovative measure, the QQE
with YCC, in supporting stronger growth and achieving higher inflation.

● Evaluating the QQE with YCC policy – The upside

In the 2018 Annual Consultation Report on Japan, we evaluated the overall effects of
the ‘QQE with YCC’ policy on the economy by looking at three key transmission
channels, namely interest rate, exchange rate, and expectations.
The policy has been relatively effective in lowering financing costs for corporates and
households by maintaining very low interest rates in both the short- and long-term.
Even though corporate and household borrowings increased only moderately, the low
interest rates stimulated domestic demand and supported growth.

In addition, easy monetary policy has resulted in a weaker Japanese yen (JPY), which
has helped to improve Japanese firms’ earnings in yen when they repatriate profits from
their overseas business. The interest rate differential between the U.S. and Japan,
reflecting the state of the two economies, could be one of the major factors behind the
depreciation of JPY. Despite not being directly targeted by the ‘QQE with YCC’ policy,
JPY depreciation have helped to improve corporate earnings and support the stock
markets, which in turn have lifted business sentiments and provided a boost to spending.

However, consumer price inflation and inflation expectations have remained subdued
despite the BOJ’s commitment to achieving its inflation target rate of 2 percent.
Although short-term inflation expectations have persistently exceeded the actual level
since 2010, followed by a sharp pick-up in the long-term expectations at the onset of the
QQE policy in 2013, inflation expectations have stayed largely at around 1 percent,
falling far short of the BOJ’s inflation target.

● Evaluating the QQE with YCC policy – The downside

The unintended adverse side-effects of prolonged easy monetary policy is primarily

visible in the financial and asset markets and among financial companies.

First, despite recent improvements, financial markets have been adversely affected by
the BOJ’s active JGB purchases. The BOJ’s massive purchase of JGBs following the
implementation of QQE in 2013 has reduced liquidity in the JGB market. The BOJ’s
continued purchases of exchange-traded funds (ETF) in the stock market may have
helped to prop up stock prices even when market sentiments worsened. However, that
may have impaired the price discovery function of the stock market and undermined its
efficiency in allocating financial savings.

Second, financial institutions suffer from declining core profitability with the tighter
interest margins. Although the ‘QQE with YCC’ policy has encouraged financial
institutions to increase lending, a secular decline in the loan-to-deposit ratio as well as
interest margins, has reduced the net interest incomes of financial institutions.
 Third, financial imbalances may have been building up in some asset markets. Since the
launch of QQE policy in 2013, the real estate loan-to-GDP ratio has grown rapidly,
going above the long-term trend. Moreover, the stock markets have benefited from high
corporate earnings and BOJ’s massive ETF purchase. In 2018, although the
price-to-earnings ratio of the stock market was slightly lower than its historical average,
the Tokyo stock price index remained higher than its long-term trend. Given some signs
of overheating in the real estate and stock markets, a sharp correction in these asset
markets may undermine confidence and lead to financial instability, although the
likelihood of this happening remains low.

● Moving Forward

Despite the BOJ’s strong commitment, achieving its 2-percent inflation target appears
like a distant goal. However, there are preliminary indications that Japan’s actual
inflation may have begun to respond to long-term inflation expectations to some degree.
This highlights the importance of the BOJ’s effective management of long-term
inflation expectations, while suggesting the need to pay closer attention to investigating
the interaction between inflation expectations and Japan’s aging population from a
longer-term perspective.

Considering all the factors above, monetary policy should continue to be reviewed and
recalibrated to address issues concerning the achievability of the targeted inflation rate,
and adverse side-effects such as the impact on the profitability of financial institutions
and the functioning of financial markets. The current mix of monetary and fiscal
policies needs periodic review and recalibration in order to revitalize the economy while
securing longer-term policy sustainability. This important task falls on the seasoned and
enterprising BOJ to come up with bold and innovative solutions to tackle Japan’s
macroeconomic challenges.

4. Bài học kinh nghiệm từ Nhật Bản(An)

Three main lessons can be drawn from the BoJ’s twenty-year effort to reflate the Japanese
economy.
- The importance of the BoJ’s price stability objective (relative to financial stability) has
increased over time, along with the clarity of the price stability target. This lack of
stability and clarity of the BoJ’s price stability objective has complicated policy
implementation and hampered reflation efforts.
- Policy decisions have not been sufficiently forward-looking and could have been better
tied to policy goals. This has likely caused a bias towards premature normalization (e.g.,
exiting ZIRP in 2000 and QEP in 2006) and delayed stimulus when conditions
deteriorated (e.g., late response to the GFC).
- The BoJ’s communication strategy has at times been overly ambitious, ambiguous, and
complicated.
- The coordination between monetary, fiscal, and financial policies has been insufficient
and at times counter-productive. Policy coordination failure and concerns about
perceived infringement on institutional independence resulted in insufficient policy
support before Abenomics and a one-sided stimulus during Abenomics.
A number of measures could be taken to strengthen the monetary policy framework and
enhance policy coordination.
- The BoJ could consider increasing policy flexibility by introducing an inflation
range target while emphasizing the medium- to long-term nature of achieving the
price stability objective. This would allow the BoJ to more flexibly address
competing policy objectives such as financial stability.
- The BoJ could consider adopting Inflation Forecast Targeting, which would
improve policy credibility and predictability by making monetary policy respond
more systematically to deviations of BoJ’s inflation forecast from the price
stability target. The BoJ could also consider simplifying its policy guidance by
de-linking the inflation overshooting commitment from the monetary base.
- Strengthen policy coordination between monetary policy and fiscal policy.
- Closer coordination between the BoJ and the FSA to better manage financial
cycles and structural financial vulnerabilities.
- Strengthening the macroprudential framework will be important to ensure
financial stability and make monetary regulation more sustainable.