October 18, 2017Hiroshi Nakaso

Deputy Governor of the Bank of Japan

Evolving Monetary Policy:The Bank of Japan's Experience

Speech at the Central Banking Seminar Hosted by the Federal Reserve Bank of New York

Note: The figure for Japan is based on BOJ staff estimations (fiscal year based). Figures for the United States and the euro area are based on the OECD estimations. Sources: Bank of Japan; OECD.

Potential Growth RateChart 1

1

-2

-1

0

1

2

3

4

5

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Japan

United States

Euro area

%

CY

Financialsystemcrisis in Japan(1997)

Globalfinancial

crisis(Sep. 2008)

Plaza Accord(Sep. 1985)

Burst of the bubbleeconomy in Japan(first half ofthe 1990s)

Asiancurrency

crisis(Jul. 1997)

Burst of thedot-com bubble(2000)

BNP Paribasshock

(Aug. 2007)

European debt crisis(2010-)

Great East JapanEarthquake(Mar. 2011)

Policy Interest RatesChart 2

Note: For Japan, for the period when no target interest rate was adopted, figures for the policy rate are the interest rate applied on excess reserves.Sources: Bank of Japan; Federal Reserve; European Central Bank; Haver; Bloomberg. 2

-1

0

1

2

3

4

5

6

7

8

9

10

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Japan

United States

Euro area

%

CY

Zero Interest Rate Policy

Quantitative Easing Policy

ComprehensiveMonetary Easing Policy

Quantitative and QualitativeMonetary Easing (QQE)

QQE with Yield Curve Control

Notes: 1. Figures for the uncollateralized overnight call rate are monthly averages.2. The CPI figures are adjusted for changes in the consumption tax rate.

Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Bloomberg.

Quantitative Easing Policy (2001-2006）Chart 3

3

0

5

10

15

20

25

30

35

40

45

-2

-1

0

1

2

3

4

00 01 02 03 04 05 06 07 08 09

trillion yen

Current account balances at theBank of Japan (right scale)

Uncollateralized overnight call rate(left scale)

CPI (all items less fresh food andenergy, left scale)

%

Quantitative Easing Policy

CY

Transition of BOJ's Monetary PolicyChart 4

4

Feb. 1999

Aug. 2000

Mar. 2001

Mar. 2006

Oct. 2010

Apr. 2013

Apr. 2013

Sep. 2016

QuantitativeEasing Policy

Current accountbalances at the

BOJ

Operating targetTarget of short-term

interest rates

(1)Affecting longer-term interest rates

(2)Affecting risk

premiums

(3)Applying a negativeinterest rate to thecurrent accounts

(4)Affecting inflation

expectations

Zero InterestRate Policy

Uncollateralized

O/N call rate

ComprehensiveMonetary Easing

Policy

Uncollateralized

O/N call rate

QQE with YieldCurve Control

Quantitative andQualitative

Monetary Easing(QQE)

Monetary base

Purchases of risk assets

(CP, corporate bonds,ETFs, J-REITs)

0 to 0.1%

(virtually 0%)

Negative territory

Policy durationeffect

(forward guidance)

Policy duration effect

(forward guidance)

Negative interest rate

(since Jan. 2016)

Purchases ofrisk assets

Large-scale JGB purchases

Yield curve control

(operating target:10-yr JGB yields)

Purchases ofrisk assets

Negative interest rate

"As low aspossible"

(virtually 0%)

Around 0%

Around 0%↓

Negative territory(since Jan. 2016)

Short- and long-term interest rates

・Short-term policy interest rate

・10-yr JGB yields

Policy duration effect

(forward guidance)

"Price stabilitytarget of 2%"(since Jan. 2013)

Inflation-overshooting commitment

JGB purchases /Fixed-rate funds-supplying operation

Strong and clear commitment

-2

-1

0

1

2

3

95 97 99 01 03 05 07 09 11 13 15 17

Natural rate of interest

Real interest rate

%

CY

Japan's Natural Rate of Interest and Real Interest RateChart 5

Note: Based on BOJ staff estimations using 10-year JGB yields, etc. For details of the estimation procedures of the natural rate of interest, see Imakubo et al. (2015), "The Natural Yield Curve: Its Concept and Measurement," Bank of Japan Working Paper Series, 15-E-5. The shaded area indicatesthe 95 percent confidence interval for the natural rate of interest.

Sources: Consensus Economics Inc., "Consensus Forecasts"; Bloomberg; Bank of Japan, etc. 5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

05 06 07 08 09 10 11 12 13 14 15 16 17

Unemployment rate

s.a., %

CY0

1

2

3

4

5

6

7

8

05 06 07 08 09 10 11 12 13 14 15 16 17

Ratio of current profits tosales (all industries andenterprises)

s.a., %

CY-5

-4

-3

-2

-1

0

1

2

-10

-8

-6

-4

-2

0

2

4

05 06 07 08 09 10 11 12 13 14 15 16 17

Output gap (left scale)

CPI (all items less fresh food andenergy, right scale)

y/y % chg.%

CY

Japan's EconomyChart 6

Notes: 1. The output gap is based on BOJ staff estimations. 2. The CPI figures are adjusted for changes in the consumption tax rate. The figure for 2017/Q3 is the July-August average.3. Figures for corporate profits are based on the Financial Statements Statistics of Corporations by Industry, Quarterly. Excluding "finance and insurance."

Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Ministry of Finance. 6

Output Gap and Prices Corporate Profits Unemployment Rate

QQE with Yield Curve Control

Source: Bloomberg. 7

Yield Curve Control Inflation-overshooting CommitmentBOJ facilitates the formation of a yield curve that is considered most appropriate for maintaining the momentum toward achieving the price stability target of 2 percent, taking account of developments in economic activity and prices as well as financial conditions.

BOJ will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI exceeds 2 percent and stays above that level in a stable manner.

Chart 7

Inflation rate

2%

Expansion of monetary base continues

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0 1 2 3 4 5 6 7 8 9 10 15 20 30 40

%

year residual maturity

Target level of the long-term interest rate"around zero percent"

Short-term policy interest rate"minus 0.1 percent"

JGB yield curve

Interest RatesChart 8

Source: Bloomberg. 8

Japan's Yield Curve 10-year Government Bond Yields in Selected Advanced Economies

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0 1 2 3 4 5 6 7 8 9 10 15 20 30 40

end-September 2017

end-March 2017

end-September 2016

July 27, 2016 (the bottom of 10-year JGB yields)

%

year residual maturity

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17

United States

Germany

Japan

%

Introduction of "QQE with a NegativeInterest Rate"

Introduction of "QQE with Yield CurveControl"

Evolution of the "Lender of Last Resort"Chart 9

Responding to the contraction of market activities resulting from concerns over counterparty risk among market participants

Liquidity Assistance to a Market

Responding to foreign currency liquidity shortages faced by globally active financial institutions

Liquidity Assistance of Foreign Currencies

9

Responding to the risk of the deterioration of business conditions at one financial institution tainting those at other financial institutions mainly through depositors' inferences

Conventional "Lender of Last Resort" Function

Responding to the risk of the deterioration of business conditions at one financial institution tainting those at other financial institutions mainly through depositors' inferences

Conventional "Lender of Last Resort" Function

Responding to the risk of the deterioration of business conditions at nonbanks destabilizing financial markets

Liquidity Assistance to Nonbanks

Network of Central Banks' Swap LinesChart 10

10

FRB

US$

BOJ

Yen

BOC

Canadian$

SNB

Swiss Franc

ECB

Euro

BOEPound

Sterling

"Designing frameworks for central bank liquidity assistance" (Excerpt)

Chart 11

Source: BIS, CGFS Papers No.58 "Designing frameworks for central bank liquidity assistance: addressing new challenges."

Growing importance of liquidity assistance for globally active financial institutions

Expansion of financial institutions' international activities, and strengthening of relationship among markets

Growing needs for transparency and accountability of liquidity assistance

Increasing difficulty in non-disclosure of the details of liquidity assistance since the global financial crisis

Rise in the weight of market-based forms of financial intermediation (funding through financial markets)

Growing importance of maintaining market function and market liquidity

Principle of Central Banks'Liquidity Assistance

Changes in the Environment Surrounding Central Banks

11

Bilateral liquidity assistance

◆ Principle of cooperation among central banks

Pirnciple 1: Allocation of responsibility

Principle 2: Information-sharing

◆ Principle of practical issue

Principle 3: Eligibility

Principle 4: Solvency

Principle 5: Collateral

Principle 6: Provision of foreign currency

Principle 7: Transparency

Liquidity assistance to a market

Better understanding of market-basedforms of financial intermediation

Information-sharing among central banksPrinciple 8:

Note: The CPI figures are adjusted for changes in the consumption tax rate.Sources: Ministry of Internal Affairs and Communications; Cabinet Office.

Japan's Economy and BOJ's Monetary PolicyReference Chart

12

-15

-12

-9

-6

-3

0

3

6

9

12

15

-4

-3

-2

-1

0

1

2

3

4

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

y/y % chg.

CY

y/y % chg.

CPI (all items less fresh food and energy, left scale)

Real GDP （right scale)

Financial system crisis

in Japan(1997)

Globalfinancial

crisis(Sep. 2008)

Plaza Accord(Sep. 1985)

Burst of the bubbleeconomy in Japan(first half of the 1990s)

Asian currency

crisis(Jul. 1997)

Burst of the dot-com bubble(2000)

BNP Paribasshock

(Aug. 2007)

European debt crisis(2010-)

Great East JapanEarthquake(Mar. 2011)

Zero Interest Rate Policy

Quantitative Easing Policy

Comprehensive Monetary

Easing Policy

Quantitative and QualitativeMonetary Easing (QQE)

QQE withYield Curve Control