Masaaki Shirakawa’s Modern Monetary Policy in Theory and Practice


I have read Modern Monetary Policy in Theory and Practice: Central Banking and Financial Markets by Masaaki Shirakawa, Governor of the Bank of Japan (BOJ).

ByTakeo Hoshi

The book was published in March this year (2008), right before Mr. Shirakawa was selected to be a Deputy Governor of the BOJ.  After a couple of candidates for Governor position, who are ex-MOF (Ministry of Finance) officials, were rejected by the opposition parties, the government recommended Mr. Shirakawa, who was a career BOJ banker, to be the Governor.  The nomination was approved and Mr. Shirakawa has become the Governor in April.

The book is in Japanese, published by Nihon Keizai Shimbun-sha.  Mr. Shirakawa, who was considered a key BOJ staff in their policy formulation before he retired in 2006, wrote this book on the “task of central banking” “based on my own experience.”  When he wrote this book, he was teaching at Kyoto University and University of Tokyo.  He probably did not expect he would be the next Governor of the BOJ when he wrote this, although he should have known that he would be an obvious candidate for a Deputy Governor. 

The book consists of six parts and twenty chapters.  The first five parts are mostly standard textbook on monetary economics and monetary policy.  Compared with many textbooks, however, this book goes more in details on the function of interbank loan markets and operations of the central banks, which is very useful.

The last part (Part VI) is probably the most interesting part of this book.  Mr. Shirakawa examines three important issues in the recent experience of the BOJ: effectiveness of quantitative easing policy, monetary policy under deflation with zero nominal interest constraint, and monetary policy responses to asset price bubble.  The three issues are important not only for Japan but relevant for many developed economies, including the U.S. today.  Unlike the first five parts, Mr. Shirakawa “expresses the author’s own view on some controversial issues,” which makes this part especially interesting.

Overall, Mr. Shirakawa’s assessment of the BOJ policy during the late 1990s and the early 2000s is positive.  Although the Japanese economy stagnated, the problem mostly came from lower productivity growth, he argues.  The BOJ did its best and avoided deflation spiral.  More aggressive monetary policy might have brought the inflation rate closer to zero but would have minimal impacts on economic growth (Chapter 19).  The quantitative easing in the early 2000s worked because it clarified the BOJ’s commitment to low (zero) interest rate better than the zero interest rate policy in the late 1990s did, not because the expansion of the quantity of money stimulated the aggregate demand.  More important contribution of the quantitative easing is found in its role in stabilizing the financial system by providing ample liquidity to the market (Chapter 18).

These discussions suggest that the BOJ under Shirakawa’s leadership will not be very different from the BOJ under Fukui.  Mr. Shirakawa, however, also suggests some monetary policy measures that he would have differently with the aid of hindsight.  For example, after pointing out that the interbank loan transactions almost disappeared during the quantitative easing period, he argues “it seems that the BOJ should have committed to a low but positive interest rate rather than zero.”  This may suggest, if the current trouble of the U.S. (and global) financial system continues and if that stops the slow but long recovery phase of the Japanese economy, Shirakawa may try to commit to continue the current low interest policy rather than cutting the policy rate to zero again.