The most pressing issue for Japan’s economy is a shortage of demand relative to supply capacity. Therefore, what is crucial is to increase demand to fill the output gap and make the economy grow at its growth potential. As I have discussed, with the zero interest rate constraint, the effect of monetary policy may be limited in creating demand.
For these reasons, the SARB projects only a moderate acceleration in actual real GDP growth, from 0.6% this year to 1.2% in 2018 and 1.5% in 2019. How can monetary policy help? How should monetary policy respond to such a situation?