Paper short abstract:

This paper analyses the monetary policy and central bank communication of the Bank of Japan during 2008-2011 with a focus on two crises: (1) the global financial crises and (2) the Fukushima nuclear disaster. We apply a principal component analysis to reduce the dimensions of monetary policy.

Paper long abstract:

The Global Financial Crisis of 2007-2008 has dramatically changed the public perception of central banking and the conduct of monetary policy. Central banks have introduced so-called unconventional monetary policies (UMP) starting with extremely low or negative interest rates and ending with interventions in government bond markets as well as other asset markets, which are considered potentially risky. At the beginning, UMP were introduced as emergency measures, but remained unchanged until now. So far, there are no signs of "normalization" to the pre-crisis standard.

In the conventional framework, central banks are setting interest rates and the economy adjusts to changes in policy rates through changes in the term structure of the Government bond markets and through adjustments in asset prices of financial markets. However, facing the lower bound of the interest rate and the malfunctioning of some financial markets (financial instability), central banks started to implement more and more complex types of unconventional monetary policy.

This paper analyses the monetary policy and central bank communication (CBC) of the Bank of Japan (BoJ) during 2008-2011 with a focus on two crises: (1) the global financial crises (GFC) and (2) the Fukushima nuclear disaster. We focus on this period because the BoJ has introduced many new measures of monetary policy during that time.

The Bank of Japan can be considered as a forerunner of central banks' adoption of unconventional monetary policies. Some measures are very specific for crises and disasters. However, "general" monetary policies are mingled with emergency measures of the regional economy. That is, one of the distinctive features of UMP is its complexity. Our data-driven analysis applies a Principal Component Analysis (PCA) as a method of dimensionality reduction for the BoJ's monetary policies. In general, PCA confirms our approach that an exclusive focus on interest rates comes short in explaining monetary policy. Results show that the complexity of monetary policy can be reduced to forms of "general" monetary policy and short-term liquidity emergency measures used in crisis times.