Special thanks are due to Linda Kole and Dave Small for their help. BIS Review 25/2003  1  would like to consider an important institutional issue, which is the relationship between the condition of the Bank of Japan's balance sheet and its ability to undertake more aggressive monetary policies.
Although, in principle, balance-sheet considerations should not seriously constrain central bank policies, in practice they do. However, as I will discuss, relatively simple measures that would eliminate this constraint are available. Finally, and most important, I will consider one possible strategy for ending the deflation in Japan: explicit, though temporary, cooperation between the monetary and the fiscal authorities. What objective for Japanese monetary policy?