This paper asks whether the BoJ’s recent experience with unconventional monetary easing has been effective in supporting economic activity and inflation. Using a structural VAR model, the paper finds some evidence that BoJ’s monetary policy measures during 1998-2010 have had an impact on economic activity but less so on inflation. These results are stronger than those in earlier studies looking at the quantitative easing period up to 2006 and may reflect more effective credit channel as a result of improvements in the banking and corporate sectors. Nevertheless, the relative contribution of monetary policy measures to the variation in output and inflation is rather small.
Japan has had a long experience with quantitative easing, dating back to 2001. Following a period of zero interest rate policy (ZIRP) during 1999–2000, the Bank of Japan (BoJ) introduced quantitative easing in March 2001. Under this policy, the BoJ used purchases of Japanese Government Bonds (JGBs) as the main instrument to reach their operating target of current account balances (CAB) held by financial institutions at the BoJ (bank reserves). The BoJ exited quantitative easing in March 2006, amid signs that the economy was emerging from deflation. Following the global financial crisis, the BoJ increased the pace of its JGB purchases and adopted a number of unconventional measures to promote financial stability. In October 2010, the BoJ introduced its Comprehensive Monetary Easing (CME) policy to respond to the re-emergence of deflation and a slowing recovery. One key measure was an asset purchase program involving government securities as well as private assets (see Ueda 2011 for a detailed description).
Research on the effectiveness of earlier quantitative easing has yielded mixed results, with most pointing to limited effects on economic activity. While most papers found evidence that quantitative easing helped reduce yields, its effect on economic activity and inflation was found to be small. The reasons cited included a dysfunctional banking sector, which impaired the credit channel, and weak demand for loans during a period when corporates were deleveraging. The situation since then, however, has improved, with a strengthening of banks’ balance sheets and restructuring of the corporate sector after the banking crisis of the late 1990s.
This paper revisits the question of whether quantitative easing and other unconventional monetary easing measures in Japan are now more effective given improvements in the banking and corporate sectors. Specifically, this paper assesses the impact of monetary easing on economic activity and inflation extending the period of analysis to 2010 to include the easing measures after the Lehman collapse. The paper finds that there is some evidence that monetary easing has supported economic activity and to a lesser extent inflation. Nevertheless, relative to all other economic variables included in the VARs a small portion of the variation in output and inflation is explained by the shocks to monetary policy variables.
IMF. Author/Editor:Berkmen, Pelin. Working Paper No. 12/2