Meanwhile, in terms of financial market stability, which is key to avoiding a sharp economic contraction, the degree of instability seems to have been relatively smaller in Japan reflecting partly the Bank of Japan's active stance as the lender of last resort.
The balance-sheet adjustment process and the effectiveness of monetary policy The second aspect with regard to the policy response concerns the effectiveness of monetary policy. As Japan's experience shows, the effectiveness of accommodative monetary policy through policy rate reductions declines substantially in an economy that is undergoing balance-sheet adjustments. This, of course, does not mean that monetary easing is ineffective.