TY - JOUR AU - Ito,Takatoshi AU - Mishkin,Frederic S. TI - Two Decades of Japanese Monetary Policy and the Deflation Problem JF - National Bureau of Economic Research Working Paper Series VL - No. 10878 PY - 2004 Y2 - November 2004 UR - http://www.nber.org/papers/w10878 L1 - http://www.nber.org/papers/w10878.pdf N1 - Author contact info: Takatoshi Ito Graduate School of Economics University of Tokyo 7-3-1 Hongo, Bunkyo-ku Tokyo 113-0033 JAPAN Tel: 81-3-5841-5608 Fax: 81-3-5841-5521 E-Mail: tito@e.u-tokyo.ac.jp Frederic S. Mishkin Columbia University Graduate School of Business Uris Hall 817 3022 Broadway New York, NY 10027 Tel: 212-854-3488 Fax: 212/662-8474 E-Mail: fsm3@columbia.edu M1 - published as Takatoshi Ito, Frederic S. Mishkin. "Two Decades of Japanese Monetary Policy and the Deflation Problem," in Takatoshi Ito and Andrew K. Rose, editors, "Monetary Policy under Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15" University of Chicago Press (2006) AB - This paper reviews Japanese monetary policy over the last two decades with an emphasis on the experience of deflation from the mid-1990s. The paper is quite critical of the conduct of monetary policy, particularly from 1998 to 2003. The Bank of Japan's rhetoric was not helpful in fighting deflation, and the interest rate hike in August 2000 amid deflation was a serious mistake. Deflation can be quite costly, and a key element in both preventing and escaping deflation is the management of expectations, using either price level or inflation targeting, because the zero lower bound on interest rates means that the overnight interest rate can no longer be used as the instrument of monetary policy. This paper proposes how to best manage expectations to exit deflation. Price-level targeting overcomes theoretical problems, such as need for a history dependent strategy, associated with inflation targeting. However, because actions speak louder than words, management of expectations also involves non-conventional monetary policies, a combination of which might have to be tried to help the Japanese economy escape its deflationary trap. ER -