Is the Bank of Japan a closet monetarist? Monetary targeting in Japan, 1978-1988

This paper investigates whether the Bank of Japan has practiced a monetarist rule since 1975. The Bank of Japan (BOJ) published a report in 1975 stating it would pay close attention to the money supply (M2), and in 1978 started announcing quarterly "forecasts" (targets) of monetary (M2) growth rates. Since 1975, the monetary growth rate has gradually declined, and inflation has subsided without causing any major fluctuations in output. This seems to be a successful example of a monetarist experiment. Has the BOJ practiced a monetarist rule, i.e., an announcement and maintenance of an M2 growth target? This paper reveals that it has not. The BOJ "forecasts" were quite accommodative in that an unexpected increase in the actual money supply was incorporated into future "forecasts" to maintain the increase in the money supply. In other words, a "forecast" did not behave like a "target" under a strict monetarist rule. Testing a monetarist rule with "forecasts" is shown to be more powerful than testing with the actual process under some weak assumptions. One of the necessary assumptions is that "forecasts" are identical to rational expectations, and the rational expectations hypothesis is not rejected by the data. Thus, we conclude that the answer to the question posed by the title is negative