Analysis of Japans Monetary Policy on Price Stability: A Vector Error Correction Model Approach

In response to prolonged deflation and economic stagnation, Bank of Japan implemented non-traditional easing monetary policies, including Quantitative Easing (QE) adopted in 2001 and Quantitative and Qualitative Easing (QQE) adopted in 2013. This paper aims to uncover the effectiveness of these policies using a Vector Error Correction Model with Johansen normalization restrictions. By analyzing the impact on Consumer Price Index, M2 Money Supply, and the Japanese yen to US dollar exchange rate from year 2000 to 2024, this research studies the short-term dynamics of Japanese economy and the long-term relationships among these variables. The results indicate that QQE was more effective than QE in stabilizing inflation and influencing the money supply, contributing to Japans economic recovery in 2024. Moreover, the research shows that the impact on exchange rate was complex, reflecting the interplay between Japan's unique deflationary environment and global financial conditions. The findings of this research suggest that the Bank of Japan may need to conduct a more aggressive and diversified measures to effectively manage inflation and stabilize the economy.