First episode: oil price hikes and the money supply-oriented monetary policy In the first episode, the rapid acceleration of money supply growth amid expansionary fiscal policy after 1971 induced rampant inflation. In spring of 1973, Japan moved to the flexible exchange rate system to mitigate the tradeoff between the free international capital flows and the control of the money supply.
Yet, the first oil price hike in late 1973 exacerbated the already strong inflationary pressures. The Bank of Japan succeeded in overcoming the rampant inflation and its stagflationary impact arising from the two oil price hikes by monitoring the money supply (M2+CDs) carefully. After the mid-1970s, the money supply growth was held down steadily, while the volatility of money supply changes diminished significantly.