This paper examines both theoretical and empirical issues concerning the monetary policy conducted by the Bank of Japan during the 1990s. In particular, it carefully separates the issues associated with the control of liquidity for money markets, from those associated with the control of business cycles. In terms of the former, BOJ monetary adjustments contributed to greatly enhancing market liquidity during the financial crises in 1997 and 1998. With respect to the latter, however, the BOJ failed to guide market expectations onto a path with mild inflation, due to insufficient attention to the flat Phillips curve and the extremely interest-elastic money demand.
