Demand for money under low interest rates in Japan

In both theoretical and empirical fields of economics, demand for money has been received much attention in the past. In Japan, deflation has been prevailed more than 20 years, and there is some possibility that the Bank of Japan’s monetary easing policy, which expands money to markets by buying government bonds, has had a significant influence apart from traditional factors. Also, exchange rates for Japanese currency have fluctuated greatly recently because of the introduction of unprecedented monetary policy in the 2010s that may have affected macroeconomic variables and the money demand function in Japan. Using Japanese experience with deflation over last two decades, I provide strong evidence that recent demand for money is affected by real GDP, exchange rates, and economic volatility; however, interest rates and consumer prices have not impacted demand for money. The results also show that introduction of the drastic quantitative easing policy changed the demand function for money.