To build the monetary base, on the asset side of the BoJ’s balance sheet, the holdings of Japanese government bonds (JGBs) would be doubled. An associated massive purchase of JGBs would alter supply and demand conditions in the JGB market and put strong downward pressure on long-term interest rates. However, there was a problem.
The 10-year government bond yield in Japan was less than 1 percent. How could we make additional room for monetary easing? The point was the real interest rate, which is the nominal interest rate minus the expected inflation rate. In this regard, the situation facing Japan, in which expected inflation rates were stagnant, fortunately provided a breakthrough to this question.