MONETARY-POLICY IN JAPAN - A STRUCTURAL VAR ANALYSIS

This paper studies the objectives and operating procedures of the Bank of Japan (BOJ) during the period 1975-1994. It uses a modified versio n of the structural VAR of Bernanke and Mihov, which nests several alt ernative hypotheses concerning central bank behavior. The approach all ows for separate identification of the anticipated and unanticipated c omponents of monetary policy, and it is capable of distinguishing betw een interest rate targeting and various types of reserve targeting. Th ree main results emerge from the analysis. First, no single target can explain the BOJ's behavior. Instead, the BOJ appears to weight both v ariation in the call money rate and variation in nonborrowed reserves, with the weight on the call money rate increasing over time. Second, there is strong evidence that at times the BOJ has employed ''moral su asion'' to counter shocks in the demand for borrowed reserves. However , by the second half of the 1980s, this procedure was no longer being used. Third, plots of the overall stance of monetary policy and its un anticipated component clearly reveal that a sharp monetary contraction occurred between early 1990 and late 1992, with an equally sharp expa nsion since then. Perhaps surprisingly, both the contraction and the s ubsequent expansion appear to have occurred largely in response to pre vailing economic conditions, rather than as an unanticipated change in policy. J. Japan. Int. Econ., September 1997, 11(3), pp. 275-295. Fed eral Reserve Bank, of San Francisco, 101 Market Street, San Francisco, California 94105; and Department of Economics, Santa Clara University , Santa Clara, California 95053. (C) 1997 Academic Press.