Introduction
Japan has had multiple phases of quantitative easing in the past 20 years. After the first round ended abruptly in 2006, the economy stayed stable for a few years and deflated again. The deflation gave cause for their second round of quantitative easing; however, it was a poor attempt and only lasted roughly two years. Other central banks began implementing these policies in the recession that shook the world economy, such as the Bank of England and the Federal Reserve. This paper will discuss methods of this short period of monetary easing and its effect on the Japanese economy and the other countries that began monetary easing.
Bank of Japan
The Bank of Japan has from 2008 adopted monetary policies to combat the effects of the great recession of 2007. The central policies that the bank of Japan used post-2007 or what is known is known as the second round of quantitative easing were (i) large scale purchase of the government bonds (ii) the use of forwarding guidance to imply a future monetary-loosening position and long-term conditional lending facility.
Purchase of government bonds
This instrument which is also known as “balance sheet policy” aimed to encourage holders of government bonds to sell them and invest in more risky assets such as foreign securiries, stocks,real estate, and corporate bonds. The facilitation of bonds purchase had affect on a wide range of markets as well as stimulating economic growth. Following the 2007 financial crisis, the Bank of Japan implemented a comprehensive balance-sheet policy, establishing an annual rate of monetary base expansion target. The Bank of Japan has been increasing the monetary base at an annual rate of approximately 80 trillion yen. It has also been purchasing Japanese government bonds (JGBs) at a rate of approximately 80 trillion yen per year in order to increase the amount of Japanese government bonds (JGBs) outstanding. The BOJ is purchasing JGBs of all maturities, including 40-year bonds, as part of its efforts to encourage a decline in interest rates across the entire yield curve. According to the BOJ, the average remaining maturity 2 of government bonds to be purchased is currently targeted in the range of seven to ten years.
In addition to government bonds, the BOJ purchased exchange-traded funds (ETFs) and Japan real estate investment trusts (JREITs) (J-REITs). This balance-sheet policy has contributed to an increase in corporate profits and employment, as well as an increase in the stock market’s value.
Monetary-easing guidance
This approach was so important as it showed clearly where the direction for the ongoing monetary easing was headed. It is a tool that enabled the bank of Japan to maintain a low-interest rate for an extended period. The bank of Japan had switched to the use of monetary base from the uncollateralized overnight call rate; thus, it applied forward guidance to indicate how Q.E. would continue performing in the economy if no significant risks were happening. This form of continuance guidance was helpful because it raised inflation expectations expected to be 2%.
Conditional long-term lending facility
BOJ provided low-cost funding to financial institutions for an amount equal to twice the amount of net lending growth available to them(in 4 years)
Impact on the economy
The Bank of Japan’s easing actions had the potential to boost economic activity and inflation through various channels. For starters, maintaining a near-zero interest rate policy could anchor inflation expectations by increasing expectations about the duration of an accommodative monetary policy stance. Second, the asset purchase program lowers term and risk premia and a wide range of long-term interest rates due to the portfolio rebalancing effect. The acquisitions may also act as a “catalyst,” improving overall financing conditions by increasing investors’ appetite for high-risk assets. Finally, direct purchases may impact wealth by increasing asset prices.
According to an analysis, the Bank of Japan’s most recent policy decisions significantly impacted asset values. Monetary easing had a statistically significant impact on various financial market indicators. Sovereign yields, for example, had declined across maturities, whereas corporate yields had declined cumulatively. Following softening developments, the rate fell by around 20 basis points in the two days. The stock market rose in four of the five instances of easing. A 5–7 percent increase.
Quantitative Easing in the USA
Quantitative Easing (Q.E.) in the USA was used after all the other monetary policies had failed in the fight against the financial crisis. The Fed reserve launched Q.E. in 2008 and ended in 2014. (Hausken & Ncube, 2013) It was also used in 2020 when the Federal Reserve bought $500 billion in Treasuries after Covid 19 epidemic. The balance sheet improved from $1 trillion to $4.6 trillion in 2014. In the first Q.E., The Federal Reserve first bought $600 billion in Treasury notes, other securities like Mortgage-backed securities in 2008. By December 2013, the government announced it would stop buying securities as the unemployment had fallen to 7%. At the same time, GDP growth was between 2-3% and an inflation rate of 2%, its last purchase being on October 29, 2014.
Bank of England
As of the end of November 2020, the Bank of England has reported buying £895 billion of bonds about quantitative easing, as shown below
The majority of the money used to buy government bonds was £875 billion, and about £20 billion was used to buy corporate bonds in the United Kingdom. (Bank of England, 2020) Over the years since the financial crisis of 2009, the Bank of England has continued purchasing bonds, with its last purchase being in November 2020
Does Quantitative Easing work?
From the case studies above Japan, USA U.K, I can boldly say that Q.E does work. In the USA, it came after exhaustion of other monetary policies that never seemed to work, as in Japan. Both USA and U.K started using Q.E after it had already worked in Japan, and it brought in results that helped respective economies.
Advantages of Quantitative Easing
The main advantages include lower interest rates brought about by a higher money supply in the economy. A high money supply makes the lenders compete with each to lead money with competitive rates. The other advantage is the lower unemployment rate when the government buys cooperate bonds during the recession, meaning the company will not be affected because the government has channeled in money. The other advantage is it brings almost instant results, as in the case of Japan, making it a financial tool that any other government can implement in its country. Another advantage is it affects inflation when used to effectively example, in Japan. It was able to bring inflation to a negative number. Once the government achieved inflation of 2% in the USA, it stopped Q.E. The last and vital advantage is that the government can control the economy. By buying government bonds or corporate bonds, the government can know if it will increase or decrease the purchase depending on the purchase results.
Conclusion
Before using Q.E., Japan tried different monetary policies after the first Recession of 1991. The different monetary policies tried only worked for some time, which affected Japan until its third recession. Only after using Q.E. can we see that Japan achieved negative inflation. After the success in Japan USA tried Q.E. and was able to control the purchase of bonds very effectively, even using it when covid hit the USA successfully. The U.K. has also used very effectively from 2019 to November 2020. From these three case studies, one major takeaway is that if the government can know when to increase the purchase and stop the purchase of either government or corporate bonds effectively, it will control inflation and the country’s employment rate to a more significant effect. In addition, other governments can learn from the three governments in our study and apply the same in their countries.
References
Bank Of England. (2020, November 5). Quantitative easing. Bankofengland.co.uk. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
F.Cargill, T. (2001). Monetary Policy, Deflation, and Economic History: Lessons for the Bank of Japan.
Fasano-Filho, U., Wang, Q., & Berkmen, P. (2012). Bank of Japan’s Quantitative and Credit Easing: Are they Now More Effective. IMF Working Papers, 12(2), 1. https://doi.org/10.5089/9781475502473.001
Hausken, K., & Ncube, M. (2013). Quantitative Easing and Its Impact in the U.S., Japan, the U.K. and Europe. In SpringerBriefs in Economics. Springer New York. https://doi.org/10.1007/978-1-4614-9646-5
Miyao, R. (2002). The Effects of Monetary Policy in Japan. Journal of Money, Credit and Banking, 34(2), 376–392. https://www.jstor.org/stable/3270693
Schenkelberg, H., & Watzka, S. (2013). Real effects of quantitative easing at the zero lower bound: Structural VAR-based evidence from Japan. Journal of International Money and Finance, 33, 327–357. https://doi.org/10.1016/j.jimonfin.2012.11.020
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