Monetary easing aims to push real interest rates in financial markets below the natural rate of interest through a lowering of the policy rate and/or increase in the supply of funds in order to stimulate economic activities such as business fixed investment and housing investment. This is the main channel through which monetary easing seeks to boost economic activity.
Although the determinants of the natural rate of interest are the subject of considerable debate, it is widely thought that the potential growth rate of the economy plays a major role. The conceptual framework I just outlined allows you to easily see that Japan’s monetary policy under deflation faced two major challenges. The first was that real interest rates remained high.