The Japanese banking system has been under extreme pressure for more than two decades, with

more than 180 banks failing since 1991. The two main reasons have been advanced to account

for its difficulties: the asset price bubble in the 1980s and poor corporate governance (Hossain,

2005). The net result is that Japanese banks hold significant levels of bad debts, some banks

have been declared insolvent and effectively nationalised by the Japanese Government.

Although estimates of the size of the losses vary, it has been suggested that the as at 2002 these

losses were as high as US$540 billion. As a consequence, the Japanese economy has experienced

a sustained period of deflation and a zero interest rate policy by the Bank of Japan in an attempt

to promote economic growth (Schifferes, 2001).

Using the theory you learned from Chapter 4 and at least four (4) other research sources, answer

the questions below:

1: Identify the circumstances that led the Bank of Japan to reduce interest rates to zero.

2: What implications does a zero interest rate policy have for a central bank’s ability to apply

monetary policy?

3: What is the current official interest rate in Japan and what steps are the Japanese Government

and the Bank of Japan taking to protect the Japanese financial system? Include in your answer

discussion of the current monetary policy strategy of the Bank of Japan.