The collapse of Japan’s “bubble economy” at the end of the 1980s was followed by slumping prices that were thought to be evidence of persistent price deflation. As such, the Bank of Japan embarked on an adventurous path that involved introducing new, unconventional monetary policy tools. These included quantitative easing by purchasing government bonds without repurchase agreements and direct purchase of corporate bonds or commercial paper to flood markets with new money.

Most of the policy initiatives of the BOJ were to engineer low interest rates, but they also supported an ongoing obsession of Japan’s policy makers with foreign exchange valuations. Meanwhile, payments on existing reserves held by commercial holds were set at 0.1 percent. And the rate on required reserves to zero is minus 0.1 percent on excess reserves.

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