Prepared by Tamim Bayoumi.
The current Article 38 was called Article 25 before the new Bank of Japan Law became effective from April 1998. Similarly, Article 33 was earlier known as Article 20.
BoJ repo operations using JGBs were first introduced in October 1997, to assist in implementing open market operations.
So called because they aim to “twist” the yield curve.
Including loans under Article 38.
See, in particular, the minutes to the Policy Board meeting on June 12, 1998.
The model relates the number of bankruptcies to their own lagged value, the output gap, the prime rate, and a time trend (the regression is BANKRUPT = 0.74* BANKRUPT(−1) − 13241* OUTPUT GAP + 18379*PRIME RATE + 42* TIME − 70832). Similar results are also found using the value of bankruptcies, instead of the number.
Government loans to businesses were calculated as the sum of outstanding loans of the People’s Finance Corporation, Japan Finance Corporation for Small Businesses, Small Business Credit Insurance Corporation, Japan Development Bank, Hokkaido and Tohoku Development Corporation, and Environmental Sanitation Business Finance Corporation.
This is true in most non “Anglo-Saxon” financial systems. For a comparison of financial system across a wide range of advanced countries see Claudio Borio, “Credit Characteristics and the Monetary Transmission Mechanism in Fourteen Industrial Countries,” in K. Alders, K. Koedijk, C. Kool and C. Winder Monetary Policy in a Converging Europe (Amsterdam: Kluwer Academic Publishers, 1996).
See Mitsuhiro Fukao, “Japanese Financial Instability and Weakness in Corporate Governance Structure,” mimeo, Keio University (1998). While financial deregulation allowed large corporations greater access to bond markets since the late 1980s, there is no significant junk bond market to provide such funds for smaller firms.
Robert Westcott, “Assessing the Risks of a Credit Squeeze Among Small- and Medium-Sized Enterprises in Japan,” in Japan—Selected Issues, IMF Staff Country Report 96/114 (October 1996)
For more details see the papers contained in a symposium on the monetary transmission mechanism published in the Fall 1995 Journal of Economic Perspectives, Vol. 9:4.
See G. Lipworth and G. Meredith, “Indicators of Monetary and Financial Conditions: A Reexamination” in B. Aghevli, T. Bayoumi and G. Meredith (eds.), Structural Change in Japan: Macroeconomic Impact and Policy Challenges (Washington: International Monetary Fund, 1998).
B. Bernanke and M. Gertler “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives, Fall 1995, Vol. 9:4, pp. 27–48.
Some commentators have suggested that such operations could potentially be made more aggressive by buying assets outright, which would increase spending power by providing liquidity (and wealth) to the economy directly, at the cost of the authorities accepting the credit risk of the borrower. (The BoJ’s recent operations mainly involved purchasing financial assets on a repo basis, so that the credit risk remained with the banks).
G. Meredith, “Monetary Policy: A Summary of Staff Views,” in B. Aghevli, T. Bayoumi, and G. Meredith (eds.), Structural Change in Japan: Macroeconomic Impact and Policy Challenges, (Washington: International Monetary Fund, 1998).
Paul Krugman, “Japan’s Trap,” http:/web.mit.edu/krugman/www/japtrap.html. Briefly, the argument is that when equilibrium real interest rate and inflation expectations are both very low, the implied equilibrium nominal interest can be such that money and bonds become perfect substitutes. Increasing inflation expectations breaks this impasse.
The size of the boost to activity is quite sensitive to the baseline, however, as it depends on the length of time that monetary policy is projected to be significantly constrained by the floor of zero percent on nominal interests rates.
The rise in the expected future price level caused by higher expected inflation would tend to lower expectations about the future nominal value of the yen. With unchanged nominal interest rate differentials, such a future expected nominal depreciation would cause a depreciation of the current exchange rate.