Amid widespread economic uncertainty, some economists prefer a more expansionary monetary policy or inflation targeting. At a recent meeting of the government's Economic and Fiscal Advisory Council, many members called on the Bank of Japan to relax credit restraints even further.
Those experts fail to recognize that the effects of monetary policies will spread only through corporate activities. Most companies today are struggling to overhaul their balance sheets, and few executives are willing to increase investments in response to the Bank of Japan's monetary expansion or inflation targeting.
Economics textbooks say that if the central bank offers additional money to commercial banks -- or if it increases its "monetary base" -- bank loans will increase and stimulate the economy. This theory would apply if banks had unlimited lending opportunities, but that is not the case in today's Japan.