Ueda, Kazuo

Japan's Prime Minister, Shinzo Abe, has declared the adoption of a policy package that assigns a key role for aggressive monetary easing by the Bank of Japan—the so-called Abenomics. Since the announcement, the yen has weakened against the dollar by 25% and Nikkei 225 has risen by 40%. In this paper I discuss the backgrounds for such large asset price response. I base the discussion on the theory and empirical analysis of non-conventional monetary policy measures that have been carried out by major central banks so far.

I argue that a non-negligible portion of the asset price response seems based on investors' excess optimism concerning the effectiveness of non-conventional monetary policy to stimulate the economy and raise prices. In that sense, there is a good chance that asset prices may go back to previous levels. But I also point out that given that expectations have changed so much, they have a chance of raising inflation to the target rate of 2%, in which case they will have become self-fulfilling.