Monetary Policy Beyond the Zero Interest Rate Policy under Deflation

The economic growth rate has been quite low during the 1990s. General prices and wages have been declining since the late 1990s, and deflation seems to have set in. Although the nominal interest rate has been zero for the last few years, that has failed to stimulate investment and consumption. Several fiscal stimulus packages—discretionary public expenditures and tax cuts—have been employed, but they too failed to stimulate private-sector investment and consumption. Due to deficit spending and declining tax revenues, the government debt-GDP ratio has risen from 60% in the beginning of the 1990s to 140% in 2002. According to the Moody’s, the Japanese government bonds are now rated below the Botswana counterpart. With apparent ineffectiveness of monetary and fiscal policy, the Japanese economy is drifting downward. The size of the nominal GDP has shrunk by 5% between 1997 and 2003