Trying to make sense of the Bank of Japan's monetary policy since the exit from quantitative easing

In this short note, I review the Bank of Japan (BOJ)'s monetary policy since its exit from the so-called quantitative easing regime early in 2006. The major characteristic of the policy stance during the period, called Strategy 2 below, has been to adjust the policy interest rate gradually upward in response to a healthy real economy despite stagnant behaviour in consumer prices. Such a policy stance can be contrasted with a hypothetical strategy, Strategy 1, whereby the BOJ would have kept the policy rate at lower levels, possibly at 0%, until inflation starts to show an upward trend more clearly. The two strategies are compared on many fronts with particular attention to well-known recent empirical regularities about inflation - a smaller response of inflation to output and larger uncertainties about the response. Various comparisons of the two strategies offered here, although far from conclusive, tend to support Strategy 1 over Strategy 2. In my discussion of the two strategies, I also comment on some of the major features of the Nishimura article in this issue.