A quarter of a century of the BoJ’s efforts to overcome liquidity trap

Abstract

Japan was the first country to experience sustained deflationary threat since the late 1990s. It stemmed from a mixture of factors of different natures, out of which domestic structural rigidities and the Great Moderation played the key role. Confronting these pressures were not easy for the Bank of Japan (BoJ). This process was lengthy and associated mistakes in monetary policy decisions proved to be unavoidable, but it led to the transition of the BoJ from an obsolete institution into a bold, innovative central bank, which since 2013 has started to set new trends in the monetary policies worldwide. Inflation, however, remained well below the 2% price stability target for most of the time over the recent decade. Inflation has begun to exceed the target significantly since early 2022. However, the BoJ stresses that the current high inflation is unsustainable due to temporary external factors and that it will fall below 2% in the near future. The ability to keep inflation at around 2% depends on sustainable wage and demand growth, as well as on the policies pursued by Kuroda’s successor.