Keynes once used the term ‘liquidity trap’ to point out the possibility that the effectiveness of monetary policy might be hampered, and the current state of Japan’s economy is quite close to such a situation.
Policy duration and quantitative easing However, even though Japan’s economy is in a situation close to a liquidity trap, a central bank cannot be a bystander when the economy is anticipated to deteriorate further. Against this backdrop, the Bank thus took decisive monetary easing measures in March. In this regard, let me bring your attention to two points.