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Vol. 68, No. 1, pp. 15-32 (2017)

“Policy Shocks and Expectations: Japan's Experience during the Great Depression”
Toshiaki Shoji (Ph.D. student, Graduate School of Economics, University of Tokyo)

To deal with the Great Depression, Japan's government implemented various policies in the early 1930s. Using monthly and daily treasury bond yields, this paper examines the effect of these policies on expectations about future nominal interest rates and inflation. By analyzing yield and forward rate curves estimated by the Nelson and Siegel method and by adopting an event-study approach, I find the following: First, all of announcement, news, and implementation of treasury bond purchase by the Bank of Japan had no effect of raising inflation expectations. Moreover, nominal interest rates declined in response to the announcement. Second, market participants anticipated Japan's withdrawal from the gold standard and the subsequent yen depreciation when Britain abandoned the gold standard in September 1931, which brought a jump in interest rate expectations. Third, fiscal shocks raised expectations, however, the effect was relatively small and not robust.