Impact of Increasing Capital Flows on the Real Economy and Financial Markets in Japan / Ineffectiveness of Monetary Policy Instruments (original) (raw)

This paper examines the effectiveness of monetary policy on domestic monetary and financial markets as well as the real economy in Japan under increasing capital flows in Japan from 2001 to 2013, based on the VAR (Vector autoregressive) model. The result shows that the monetary policy instruments (monetary base,the Bank of Japan current account, and call rate) have become increasingly influenced by capital flows recently. Particularly, the effects of capital flows, especially shortterm capital flows (portfolio, other investments, derivatives), have put significant impact on the major monetary policy variables. It is also shown that the excess reserves of the BOJ account may be utilized for financial investment, not for productive investment in the real economy. The monetary policy has thus become less effective in controlling the domestic market, as part of the policy tools used in reviving and expanding the real economy. Therefore, Bank of Japan is expected to take sensible monetary policy in the context of the global economic and market conditions, especially the international capital flows, which are significantly influenced by the monetary policy of advanced economies.