Introduction: Historical Fiasco of the Monetary Policy

Kikuo[aut]Iwata, Kikuo Iwata, who was the Deputy Governor of the Bank of Japan (BOJ), and other reflationists argue that deflation in Japan could be solved by the monetary policy of the BOJ, which works on inflation expectations. Their tools are a Japanese-style inflation targetJapanese-style inflation target with a deadline and clearing responsibilities of the BOJ and a massive supply of monetary base. Based on this theory, the BOJ under Kuroda[aut]Kuroda, Haruhiko started implementing quantitative and qualitative monetary easing in March 2013, but eventually, Kuroda stepped down without achieving the target. We show that this failure was theoretically inevitable. Instead, what drives consumer prices in Japan are costs, especially import prices. Reflationists, however, argue that the policies they advocate are standard in mainstream American economicsMainstream economics. Conversely, Bernanke[aut]Bernanke, Ben S. and Gertler[aut]Gertler, Mark now realize that the BOJ cannot solve deflation. We also show that both the massive supply of monetary base and the Japanese-style inflation targetJapanese-style inflation target advocated by the reflationists have been abandoned after only about three years. Logically, this would mean a complete defeat for the BOJ and the reflationists, but in order to save their positions and reputationsPositions and reputations, the BOJ under Kuroda continued to pretend the policies advocated by reflationists were in place and succeeding.