NIHON'S FINANCIAL SENTINELS: EXAMINING THE ROLE OF CENTRAL BANK CREDIBILITY IN JAPAN

Abstract

This study investigates the impact of the Bank of Japan's (BOJ) credibility on the Japanese economy. Following the burst of the so-called bubble economy in the early 1990s, Japan faced severe economic challenges. Despite implementing unprecedented zero-interest policies to combat deflation and stimulate the economy, the BOJ's efforts proved ineffective. The mid-1990s saw the Asian currency crisis further exacerbating Japan's economic woes. In 2001, the BOJ pioneered the quantitative easing policy, a novel approach globally. This monetary authority continued to employ quantitative and qualitative monetary easing measures, including negative interest rates akin to the European Central Bank.

Japan's debt-to-GDP ratio, among developed nations, reached alarming levels, leading to heavy reliance on monetary policies due to the deterioration of fiscal conditions. The adoption of inflation targeting, a framework embraced by approximately 30 central banks worldwide, offered potential benefits, including improved market transparency, enhanced accountability, and stability of expected inflation rates.

This study underscores the critical role of central bank credibility in macroeconomic stabilization and economic performance. While studies on the relationship between credibility and economic performance have been explored in developing economies, research in developed economies, including Japan, is still in its nascent stages. Recognizing the importance of market credibility in monetary policy is essential for achieving economic stability