The Effectiveness of Unconventional Monetary Policy on Japanese Bank Lending

This chapter analyzes the effectiveness of Japan’s bold experiment with unconventional monetary policy. Japan’s early experiments with unconventional monetary policy were born of necessity. Despite the expansionary open market operations, toward the end of 1998 and early in 1999, long-term interest rates actually increased and the yen appreciated. Zero Interest Rate Policy was lifted at the August 2000 monetary policy meeting and the target call rate was raised back to 25 basis points. In October 2010, with little room for further tweaks using conventional policy measures, the Bank of Japan introduced a “Comprehensive Monetary Easing” policy. Conventional monetary policy is thought to work mostly through the so-called interest rate channel. Unconventional monetary policies in some ways work much like conventional monetary policy. Unconventional monetary policy has negative side effects. However, some of the biggest risks of unconventional monetary policy are felt in the banking system