Effectiveness of the Easing of Monetary Policy in the Japanese Economy, incorporating Energy Prices

Japan has reached the limits of conventional macroeconomic policies. In order to overcome deflation and achieve sustainable economic growth, the Bank of Japan (BOJ) recently set an inflation target of 2 per cent and implemented an aggressive monetary policy so this target could be achieved as soon as possible. Although prices started to rise after the BOJ implemented monetary easing, this may have been for other reasons, such as higher energy prices as a result of the depreciated Japanese yen. This paper shows that quantitative easing may not be able to stimulate the Japanese economy. Aggregate demand, which includes private investment, did not increase significantly in Japan with lower interest rates. Private investment displays this unconventional behaviour because of the uncertainty about the future and because Japan's population is ageing. The paper concludes that the remedy for Japan's economic policy is not to be found in its monetary policy.