The Effects of Monetary Policy Shocks in Japan

This study examined the role of interbank market rates in the conduct of Japanese monetary policy and the effects of monetary policy shocks in Japan. This issue is whether monetary policy innovations in Japan are better represented by shocks in an interest rate or in money. A typical result for Japanese data is that the Bank of Japan uses the interbank market rate as its operating target rather than total reserves. I found that the call money rate(CMR) innovations are a better indicator of policy stance than the money innovations (M2+CDs) in Japan. This stated that the interbank interest rate continues to be the primary operating instrument of the Bank of Japan despite primary major institutional changes in Japanese financial markets over the past decade.