If we had named the commitment to the duration of the zero interest rate policy introduced in 1999 an eye-catching “forward guidance”, the Bank might have received an honor as the inventor of this policy tool. However, despite the tailwind in the real economy and considerable efforts by the Bank, Japan’s economy could not overcome deflation. What was lacking?
To state the answer first, what lacked was the central bank’s strong and clear commitment to achieve its price stability target and its actions to work on inflation expectations through that commitment. To begin with, if we look into the causes of Japan’s price declines, various factors have had an effect at each point in time.