Japan has been known globally as an economy struggling to overcome long-standing deflation and deflationary mindsets since the late 1990s. Major central banks have attributed Japan's deflation to insufficient monetary easing. To avoid the same problem and reduce the risk of deflation, the Federal Reserve promptly and without hesitation adopted unconventional monetary easing measures in the wake of the global financial crisis. The Bank of Japan followed suit in April 2013 when it adopted quantitative and qualitative monetary easing (QQE) under new Gov. Haruhiko Kuroda.
The main measures under QQE were purchases of various assets. The BOJ further experimented a negative interest rate and yield curve control. These measures were expected to raise aggregate demand and accelerate inflation through a decline in long-term interest rates with a commitment to achieving a 2 percent inflation target. Stock prices and the yen's depreciation were also expected through a portfolio rebalancing effect and interest rate differentials.
Four years later, overvaluation of the yen and undervaluation of stock prices have been corrected. But, the impact on the real economy has not been as strong as initially expected. Compared with the first quarter of 2013, households' current real consumption dropped a little. Business investment remains well below cash flows due to stagnant sales despite historically high profits levels. Underlying inflation remains at around zero percent, a reflection of unimpressive aggregate demand. In 2017, inflation is expected to rise mainly due to the weakened impact of the oil cost drop on prices, but it is widely expected that the BOJ is unlikely to achieve inflation of around 2 percent stably anytime soon.