In addition, in the aforementioned deflationary equilibrium, innovation by firms was stifled and productivity growth thus subdued for a protracted period. Against this backdrop, for Japan’s economy to grow on a sustained basis, it is critical to address all three sources of growth.
Thus, the first stage of the monetary transmission mechanism – namely, the effect of monetary easing permeating financial markets – is well under way. Once firms and households take advantage of such accommodative financial conditions and embark on business investment and consumer spending, the second stage of the transmission mechanism – namely, financial conditions permeating economic activity and prices – will strengthen.