Supplementary Paper Series for the "Comprehensive Assessment" (2): Developments in the Natural Rate of Interest in Japan

The natural rate of interest is the real interest rate at which economic activity and prices neither accelerate nor decelerate. The basic mechanism of monetary easing -- regardless of whether it is conducted through conventional or unconventional policy means -- consists of driving the real interest rate below the natural rate of interest. Theoretically, therefore, in order to assess the effects of monetary easing, it is necessary to estimate the natural rate of interest, which is by nature unobservable, and determine whether the real interest rate is higher or lower, relative to the estimated natural rate of interest. This paper estimates the natural rate of interest using a number of different approaches. While the estimates differ to some extent depending on the approach taken, the estimation results suggest that it is likely that Japan's natural rate of interest is currently at a low level of around 0 percent.