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Economic Quarterly

Summer 2003

Japanese Monetary Policy and Deflation

Robert L. Hetzel

The price level is falling in Japan. To end deflation, the Bank of Japan should move to a strategy of actively creating bank reserves and money in response to price level deviations from an explicit target. Under the current policy, bank reserves are demand-determined rather than supply-determined. Current procedures limit reserves creation to the amount demanded at a zero short-term interest rate.

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