The first role of monetary policy in this context, needless to say, is to stimulate aggregate demand through large-scale monetary easing, fill the output gap, and thereby bring Japan’s economy back to its potential growth path; in other words, to break the vicious cycle between deflation and recession by overcoming deflation.
During the process of the output gap diminishing as a result of QQE, Japan’s potential growth rate is likely to rise to some extent. The reason is that workers will be able to work more efficiently, and capital investment will increase and technological innovation advance as firms, reflecting the improved business sentiment, become more willing to take risks.