2,227 research outputs found
Japan's Deflation and the Bank of Japan's Experience with Non-traditional Monetary Policy
No full textThis paper offers a brief summary of non-traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades, especially the period between 1998-2006, when the so-called Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) were put in place. The paper begins with a typology of policies usable at low interest and inflation rates. They are: strategy (i), management of expectations about future policy rates; strategy (ii), targeted asset purchases; and strategy (iii), QE. Alternatively, QE may be decomposed into a pure attempt to inflate the central bank balance sheet, QE0, purchases of assets in dysfunctional markets, QE1 and purchases of assets to generate portfolio rebalancing, QE2. Strategy (ii), when non-sterilized, is either QE1 or QE2. Using this typology, I review the measures adopted by the BOJ and discuss evidence on the effectiveness of the measures. The broad conclusion is that strategies (i) and (ii) have affected interest rates, while no clear evidence exists so far of the effectiveness of strategy (iii), or QE0. Strategy (ii) has been effective especially in containing risk/liquidity premiums in dysfunctional money markets; that is, QE1 has been effective. The effectiveness of QE2, however, is unclear. The strategies, however, have failed to bring the economy out of the deflation trap so far. I discuss some possible reasons for this and also implications for the current U.S. situation.
Japanfs Deleveraging since the 1990s and the Bank of Japanfs Monetary Policy: Some Comparisons with the U.S. Experience since 2007
No full textThis paper discusses the backgrounds for the stagnant behavior of the Japanese economy during the last two decades and the failure of the Bank of Japan (BOJ) to turn the economy around. I argue that the policy authorities did not act quickly enough to mitigate the pain of the deleveraging process in the aftermath of the burst of land and stock price bubble in the early 1990s. Thus, the process became overly severe and protracted. The economy increasingly became vulnerable to negative external shocks and the decline in its population. Use of non-conventional monetary policy measures after deflationary expectations became entrenched substantially weakened their power to stimulate the economy. The U.S. economy since 2007 has exhibited many of the features seen for the Japanese economy during the last two decades; hence, the talk of the Japanization of the U.S. economy. There are, however, many dissimilarities as well as similarities between the two episodes. These are also discussed along with the analysis of Japanfs two lost decades.Popular discussions of Japanfs stagnation often focus on persistent deflation. Figure 1 shows core CPI inflation and a representative property price index for Japan and the U.S. since the peak of property prices, with the peak (T=0) assumed to be 1990 for Japan and 2006 for the U.S. In addition, it also plots investment in structures relative to GDP in Japan. Inflation in Japan has been in negative territory since 1998.1 There has been, however, no tendency for the deflation to accelerate. The cumulative decrease in the index since the late 1990s has been only about 5%. Thus, the classic debt-deflation type dynamic has not been a major cause of economic stagnation. In contrast, declines in property prices in Japan since the peak has been large and protracted-cumulating in a 60% decline at the time of writing. They led to significant deleveraging by financial institutions and non-financial corporations, which put downward pressure on aggregate demand for goods and services, especially, investment in structures, the component of aggregate demand most sensitive to property prices. The figure shows that its movements have been highly correlated with those of property prices.2 As may be seen from the figure, this component of aggregate demand alone subtracted about 0.4% per year from GDP growth during the 1990s. Such a negative feedback loop among asset prices, economic activity and, as we discuss below, financial instability has been the key feature of Japanfs stagnation. It is also interesting to note that both CPI inflation and property prices in the U.S. since the recent financial crisis have followed closely that of Japan in the 1990s, but inflation has so far avoided plunging into negative territory. Adjustment in asset prices and real investment were to some extent inevitable given the extent of the excesses created during the bubble period. The deleveraging process, however, became extremely protracted as a result of a forbearance game played by policymakers and financial institutions. Banks kept lending for a while to zombie companies in order to avoid recognition of losses on their balance sheets, and the authority stayed away for years from making the tough decision to recapitalize the banks. This resulted in a huge buildup of bad loans and eventually in a serious credit crunch in the late 1990s, which aggravated the declines in asset prices and deleveraging by banks and nonfinancial corporations. Banks increasingly became risk averse and stopped lending to risky, but promising projects. The economy slowly, but steadily lost momentum and could not grow out of the negative shocks generated by external financial crises in the late 1990s and 2000s, and the declines in its population that started in the 2000s. Deflation of the general price level did play a part in this process as well. It has hindered the effectiveness of monetary easing. This is ironic because monetary policy normally is a tool for avoiding deflation. Either the deleveraging forces outweighed the capacity of monetary policy to stimulate the economy or the BOJ easing came a bit too late. The BOJ tried to reverse the disinflation trend with fairly aggressive rate cuts - a conventional monetary policy tool-- and brought the policy rate to near zero by late 1995, effectively hitting the zero lower bound (ZLB) constraint on interest rates. Deflation, however, developed in response to economic weakness. The real interest rate has stayed at higher levels than desirable, and undermined the power of a zero interest rate to stimulate the economy, although it did not throw the economy into a deflationary spiral. Since the late 1990s, the BOJ has adopted a variety of non-conventional monetary policy measures. They have supported the financial system and prevented deflation from becoming worse, but have not turned the economy around. As I argue below, non-conventional measures work by reducing risk premiums and long-short interest rate spreads. The long period of economic stagnation had lowered these spreads to minimum levels and limited the effectiveness of such measures as was the case for conventional measures. In the following I will describe in more detail the deleveraging experience in Japan and then turn to discussing the experience of the BOJ to turn the economy around. Comparisons with the U.S. experience since 2007 are offered at each stage of the discussion
The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market (Subsequently published in "International Journal of Central Banking", March 2006, Vol.2, No. 1, 105-136. )
No full textThis short paper shows that under the Bank of Japan's Zero Interest Rate Policy and Quantitative Monetary Easing, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. Using the data on individual banks' Negotiable Certificate of Deposit rates, we first show that the dispersion of the rates among banks has fallen since 1999, the year of the adoption of the Zero Interest Rate Policy and has reached almost zero by 2004. We next show that the fall in the dispersion of the rates is not explained by a corresponding fall in the dispersion of the credit ratings of the banks. Rather, credit risk premiums seem to have disappeared in the money market. We also discuss possible relationships between this result and the Bank of Japan's monetary policy.
"The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market"
No full textThis short paper shows that under the Bank of Japan's Zero Interest Rate Policy and Quantitative Monetary Easing, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. Using the data on individual banks' Negotiable Certificate of Deposit rates, we first show that the dispersion of the rates among banks has fallen since 1999, the year of the adoption of the Zero Interest Rate Policy and has reached almost zero by 2004. We next show that the fall in the dispersion of the rates is not explained by a corresponding fall in the dispersion of the credit ratings of the banks. Rather, credit risk premiums seem to have disappeared in the money market. We also discuss possible relationships between this result and the Bank of Japan's monetary policy.
The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market (subsequently published in "International Journal of Central Banking", March 2006, Vol.2, No. 1, 105-136. )
No full textUsing the interest rates on Negotiable Certificate of Deposit issued by individual banks, we first show that under the Bank of Japan's Zero Interest Rate Policy and Quantitative Monetary Easing Policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums.
"The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market"
No full textUsing the interest rates on Negotiable Certificate of Deposit issued by individual banks, we first show that under the Bank of Japan's Zero Interest Rate Policy and Quantitative Monetary Easing Policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums.
Japanese quantitative easing: The effects and constraints of anti-deflationary monetary expansions
No full textAn undergraduate dissertation in Monetary Economics. The aim of this dissertation is to empirically analyse the effects of the Bank of Japan’s anti-deflationary Quantitative Easing Policy carried out between March 2001 and April 2006. In doing so, this study also reviews the zero bound to interest rates, defined as the primary constraint to the effectiveness of conventional monetary policy at the interest rate floor. The results of the economic models contained in this study confirm the economic significance of a sustained increase in liquidity in fostering a return to inflationary pressures. Moreover, the findings of the study confirm that effective anti-deflationary policies may not necessarily entail extreme measures on the part of a central bank; on the other hand, credibility coupled with a resolved commitment may very well be enough to provide for positive macroeconomic repercussions.Deflation; monetary policy at the zero-bound; quantitative easing
Trying to Make Sense of the Bank of Japan's Monetary Policy sinse the Exit from Quantitative Easing ( Published in "International Finance", Winter 2007, Vol. 10, No.3, 301-16. )
No full textIn this short note I review the Bank of Japan?s monetary policy since its exit from the so-called quantitative easing regime early in 2006. The major characteristic of the policy stance during the period, called Strategy 2 below, has been to adjust the policy interest rate gradually upward in response to a healthy real economy despite stagnant behavior in consumer prices. Such a policy stance can be contrasted with a hypothetical strategy, Strategy 1, whereby the Bank of Japan would have kept the policy rate at lower levels, possibly at zero percent, until inflation starts to show an upward trend more clearly. The two strategies are compared on many fronts with particular attention to well-known recent empirical regularities about inflation —a smaller response of inflation to output and larger uncertainties about the response. Various comparisons of the two strategies offered here, though far from conclusive, tend to support Strategy 1 over Strategy 2. In my discussion of the two strategies I also comment on some of the major features of the Nishimura article in this issue.
The Bank of Japan's Struggle with the Zero Lower Bound on Nominal Interest Rates: Exercises in Expectations Management (subsequently published in "International Finance", Summer 2005, Vol. 8, No. 2, 329-350. )
No full textThis paper reviews and evaluates the Bank of Japan (BOJ)'s monetary policy during the period 1998-2005. In doing so, it pays particular attention to the development of academic thinking on what central banks can do at or near zero interest rates and its relationship with the actual policy measures adopted by the BOJ. The paper argues that the BOJ has done most of the things recommended by academic economists. The most important of these is expectations management as crystallized in the so-called zero interest rate policy. The academic origin of this policy can be found in the seminal work of Krugman. The paper points out, however, that this fact, unfortunately, remained unnoticed by many, and explores reasons behind. The paper then goes on to survey the empirical literature on the effects of the measures adopted by the BOJ. The literature has found that the zero interest rate policy has had significant effects on the term structure of interest rates and supported the economy. Finally, the paper discusses possible reasons for the failure of such measures to stop the deflation of the economy within a short period of time. It points out some difficulties inherent in the expectations management approach and problems created by the impaired financial system.
"Trying to Make Sense of the Bank of Japan's Monetary Policy since the Exit from Quantitative Easing"
No full textIn this short note I review the Bank of Japan's monetary policy since its exit from the so-called quantitative easing regime early in 2006. The major characteristic of the policy stance during the period, called Strategy 2 below, has been to adjust the policy interest rate gradually upward in response to a healthy real economy despite stagnant behavior in consumer prices. Such a policy stance can be contrasted with a hypothetical strategy, Strategy 1, whereby the Bank of Japan would have kept the policy rate at lower levels, possibly at zero percent, until inflation starts to show an upward trend more clearly. The two strategies are compared on many fronts with particular attention to well-known recent empirical regularities about inflation -a smaller response of inflation to output and larger uncertainties about the response. Various comparisons of the two strategies offered here, though far from conclusive, tend to support Strategy 1 over Strategy 2. In my discussion of the two strategies I also comment on some of the major features of the Nishimura article in this issue.
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