On the role of monetary policy in a deflationary economy: The case of Japan

In this paper we review the role of monetary policy for a country facing de flationary pressure based on the recent experience of the Japanese economy. We discuss economic background of inflation policy in Japan and analyze th e impacts of the policy. We made simple calculations regarding how much the debt of selected companies and government can be reduced by mild inflation Noting that the Fisher effect does not work perfectly under liquidity trap s, the effect of inflation on debt issue appears quite large. To maintain c ontrollable stable inflation, inflation targeting is a good candidate far t he policy rule. (C) 2000 Academic Press Journal of Economic Literature Clas sification Numbers: E31, E52, E58.