Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective?

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

Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective?

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IMF Review of the Flexible Credit Line and Precautionary Credit Line

With the creation of the Flexible Credit Line (FCL) and Precautionary Credit Line (PCL), the Fund’s GRA toolkit was overhauled to address gaps in the Fund’s crisis prevention and resolution toolkit. The innovative and flexible nature of the new instruments was meant to reduce stigma from using Fund resources, underpinning confidence in its users amid stressed market conditions.

Yet, there have been a limited number of members with these Using a variety of methodological tools, this review assesses experience with the instruments, arrangements. Using a variety of methodological tools, this review assesses experience with the instruments, reflects on the appropriateness of their design, and recommends refinements to enhance their effectiveness.

IMF.Date:November 1, 2011

Review of the Flexible Credit Line and Precautionary Credit Line

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Niger.First Shared Growth Credit Project

Niger is one of the world’s poorest countries. About 80 percent of the population derives their livelihoods from agriculture and livestock. A harsh climate, frequent droughts, and poor soils, but also poorly performing agricultural institutions contribute to the low productivity of these activities in Niger.The other important economic activity is mining, primarily focused on exploiting rich uranium deposits. With large investments in further development of the uranium sector as well as other natural resources such as gold and oil underway, the importance of natural resource extraction for the economy and its contribution to government revenue is set to increase substantially in the coming years. Unfortunately, the contribution of the mining and petrol sector to employment generation is likely to remain modest, although certainly not insignificant.

The formal sector is small and much of Niger’s economic activity takes place in the informal sector. Niger’s business environment is one of the most difficult worldwide, reflecting both Niger’s geographic situation, but also a weak regulatory regime, a poorly developed financial sector, and very limited infrastructure services. Niger’s dependence on agriculture and mining make it highly vulnerable to climatic shocks and changes in international demand for Niger’s natural resources. To reduce this vulnerability and to accelerate growth, strengthening the agriculture sector, private sector led diversification of the economy beyond agriculture and mining is critical. With the likely increase in government revenue from the mining sector, strengthened public expenditure and financial management are also key to ensure that public resources are used efficiently and effectively in pursuit of the implementation of Niger’s Second Poverty Reduction Strategy (PRSP-II)...

IDA has a long standing involvement in Niger, providing assistance to government in implementing IDA has been providing budget support to Niger since the early 2000’s, supporting key policy reforms and providing resources for the implementation of Niger’s PRSP. The proposed new series of DPOs continues the focus of the preceeding series of two development policy operations (DPOs) on the above areas.

The overall development objective is to support policy reforms that would help to achieve an increase in per capita incomes, increased resilience to external shocks, and increased improvements in access to social services and income earning opportunities for the poor.

World Bank.Document Date: 2011/11/14.Document Type:  Program Information Document.Report Number:AB6870.Volume No: 1 of 1

Niger - First Shared Growth Credit Project

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New EU fundraising rules:boosting venture capital for SMEs and easing access to credit

European Commission. Press release.Brussels,07 December 2011. Access to finance is essential to enhance the competiveness and growth potential of SMEs. In the context of the current crisis, marked by a fall in lending to the real economy, it is increasingly difficult for such companies to access loans. For this reason the European Commission is presenting a strategy to promote better access to finance for SMEs with an EU Action Plan (see MEMO/11/879) which includes increasing financial support from the EU budget and the European Investment Bank and a proposal for a regulation setting uniform rules for the marketing of venture capital funds.

The new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation "European Venture Capital Fund" across the EU. No longer will they have to meet complicated requirements which are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.

In addition to the measures presented last week, including €1.4 billion of new financial guarantees under the Programme for the Competitiveness of Enterprises and SMEs (COSME (2014-2020) - IP/11/1476), the European Investment Bank will keep its SME loan activity at a sustained pace, close to the 2011 level of €10 billion.

European Commission Vice President Antonio Tajani, responsible for Industry and Entrepreneurship, said: “Easing access to finance for SMEs is priority number one to get out of the crisis. Our Action Plan underlines that Europe is doing its utmost to improve SMEs' access to finance. We aim to strengthen our EU financial instruments for SMEs and to improve their access to finance markets.”

Internal Market Commissioner Michel Barnier said: "We need more venture capital in Europe. By helping companies become more innovative and competitive, venture capital will create Europe's companies of the future. In order to support the most promising start-ups, venture capital funds must become bigger and more diversified in their investments. Today's proposals will help develop this emerging market."

SME Action plan

Europe's economic success depends largely on the growth of small- and medium- sized enterprises (SMEs) achieving their potential. SMEs contribute more than half of the total value added in the non-financial business economy and provided 80% of all new jobs in Europe in the past five years. The European Commission is presenting in an Action Plan the various policies that it is pursuing to make access to finance easier for Europe's 23 million SMEs and to provide a significant contribution to growth. Proposed regulatory and other measures aim at maintaining the flow of credit to SMEs and to improving their access to capital markets, by increasing the visibility to investors of SME markets and SME shares, and by reducing the regulatory and administrative burden.

Venture capital for SMEs

Venture capital, which provides early finance to start-ups, forms an important source of long-term investment to young and innovative small- and medium-sized enterprises (SMEs). However, small fund sizes and only being able to provide low levels of capital have prevented them from playing a more important role in start-up financing. As a result, SMEs continue to depend on short-term bank loans. But in the context of the current crisis, marked by a fall in lending to the real economy, it can be very difficult for such companies to access this type of loan.

Evidence examined by the Commission shows that a company with long-term venture capital investors is more successful than a company that needs to rely on short-term finance from banks. This is commonly attributed to the rigorous screening that a venture capital fund undertakes prior to investing in a company. But the average European venture capital fund is small and far beneath the optimal size necessary for a diversified investment strategy to make a meaningful capital contribution to individual companies and thereby produce real impact. While the average venture capital fund in the European Union contains approximately €60 million, a U.S. counterpart has a fund size of €130 million on average.1 Economic studies show that venture capital funds can make a real difference for the industries they invest in once their size reaches approximately €280 million.2 Furthermore, U.S. venture capital funds invested around €4 million on average in each company; whereas European funds could only muster investment volumes of €2 million on average per company. Early-stage capital investments in the U.S. were on average €2.2 million per company while early-stage capital contributions in the EU were on average €400 000 per company. 

Bigger venture capital funds mean more capital for individual companies and will give the funds the ability to specialise in particular sectors such as information technology, biotechnology or health care. This is turn should help SMEs have a more competitive edge in the global marketplace.

See also MEMO/11/879
More information: http://ec.europa.eu/enterprise/policies/finance/index_en.htm

Key elements of the proposal on venture capital:

The proposal lays down a uniform "single rule book" governing the marketing of funds under the designation "European Venture Capital Funds". A "European Venture Capital Fund" is defined by three essential requirements: 1. It invests 70% of the capital committed by its sponsors in SMEs; 2. it provides equity or quasi-equity finance to these SMEs (i.e. 'fresh capital'); and 3. it does not use leverage (i.e. the fund does not invest more capital than that committed by investors so is not indebted). All funds that operate under this designation must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The "single rule book" will ensure investors know exactly what they get when they invest in European Venture Capital Funds.

The proposal creates a uniform approach for the categories of investors which are eligible to commit capital to a "European Venture Capital Fund". Eligible investors will be professional investors as defined in the 2004 Markets in Financial Instruments Directive (MiFID - see IP/04/546) and certain other traditional venture capital investors (such as high net-worth individuals or business angels). The uniform rules on venture capital investors will make sure that marketing can be tailor-made to the needs of these investor categories.

The Regulation will provide all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU. This is a marked improvement over the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive (AIFMD - see MEMO/10/572) as the existing passport provided under AIFMD is only applicable to managers whose assets under management are above a threshold of €500 million. In addition, the rules of the AIFMD create a legal framework typically aimed at hedge funds and private equity firms, and are less suitable for the typical venture capital fund which would get a tailor-made regime.

Next steps:

The proposal on Venture Capital now passes to the European Parliament and the Council (Member States) for negotiation and adoption under the co-decision procedure.

See also MEMO/11/880.

Proposal for a Regulation on European Venture Capital Funds

The proposal sets out a new “European Venture Capital Fund” label and includes new measures to allow venture capitalists to market their funds across the EU and grow while using a single set of rules. Every fund using the label will have to prove that a high percentage of investments (70% of the capital received from investors) are spent in supporting young and innovative companies. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger. Bigger venture capital funds mean more capital for individual companies giving them the ability to specialise in particular sectors such as information technology, biotech or life-science. This is turn should help SMEs have a more competitive edge in the global marketplace.

Citizens’ summary

FAQs

Proposal of the Commission(Provisional version. The final text will be available soon)

Impact assessment:

• Full text(Provisional version. The final text will be available soon)
• Summary(Provisional version. The final text will be available soon)

More information:

http://ec.europa.eu/internal_market/investment/venture_capital_en.htm

Contacts :Chantal Hughes (+32 2 296 44 50)
Carlo Corazza (+32 2 295 17 52)
Carmel Dunne (+32 2 299 88 94)
Sara Tironi (32 2 299 0403)

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IMF Executive Board Approves US$133.6 Million Arrangement Under the Extended Credit Facility for the Islamic Republic of Afghanistan

IMF.Press Release No. 11/412. November 15, 2011.The Executive Board of the International Monetary Fund (IMF) approved on November 14, 2011 a three year, SDR 85 million (about US$133.6 million) arrangement under the Extended Credit Facility (ECF) for Afghanistan which is designed to support the nation's economic program from 2011 to 2014. The approval will immediately enable an initial disbursement of an amount equivalent to SDR 12 million (about US$18.9 million).

The IMF-supported economic program’s key objectives are to make significant progress toward a stable and sustainable macroeconomic position while managing the challenges of the withdrawal of the international presence in Afghanistan; strengthening the banking system and addressing the governance and accountability issues highlighted by the Kabul Bank crisis; moving toward fiscal sustainability; and improving the transparency and efficiency of public spending and services to protect the poor.

Following the Executive Board's discussion of Afghanistan, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, said:

“Despite a difficult political and security situation, Afghanistan has made important achievements in recent years. Growth has averaged over 10 percent in the last five years, inflation was moderate, and domestic revenues increased by 3 percent of GDP.

“After the collapse of Kabul Bank, the authorities took action to contain the situation and prevent a broader financial meltdown, including providing a full deposit guarantee. Since then, Kabul Bank was split into a good bank and a bad bank, and an in-depth audit is under way to establish who benefited from the fraudulent activities. Asset recovery and legal actions against the architects of the fraud have lagged and need to be pursued more forcefully. It is important that the relevant prior action is fully met before the first review of the program.

“Over the next three to five years, the withdrawal of the international military presence and an expected decline in foreign aid will pose significant economic policy challenges. The government will have to take over activities currently financed by donors, including shouldering a larger share of security spending. Thus, while donor support is projected to remain substantial, the expected gradual decline will curtail the fiscal space and require external adjustment.

“The authorities’ three-year program, supported by the Fund’s Extended Credit Facility, will help address these short and medium-term challenges and provide the basis for sustained inclusive growth and poverty reduction in line with Afghanistan’s National Development Strategy. It is important that the authorities accelerate measures to enhance governance, including strengthening the banking law and financial sector supervision, as well as the framework for anti-money laundering and combating the financing of terrorism. They are also encouraged to be more ambitious on domestic revenue mobilization, which may require measures in addition to the planned revenue administration reforms and the introduction of a value-added tax in 2014.”

ANNEX

Recent Economic Developments

The authorities have taken steps to lay the foundation for economic stability and growth, despite a very difficult security situation and the challenges associated with building political and economic institutions. As a result, economic activity has been robust, with real GDP growth averaging more than 10 percent annually over the past five years. The government has increased revenue collection to 11 percent of GDP in 2010/11 from 8 percent in 2008/09, though current collection levels cover only about two-thirds of central government operating expenditures.

Some poverty indicators have improved over the last decade, but Afghanistan remains one of the poorest countries in the world. Per-capita income was US$530 in 2010/11. The national poverty rate was 36 percent in 2007/08, as measured by the National Risk and Vulnerability Assessment, and the rates are higher in rural and mountainous areas that account for about 80 percent of the population.

Program Summary

Stabilizing the economy. Despite an expected decline in overall donor assistance, the authorities’ goal is to sustain annual real GDP growth at about 6–7 percent over the next three years, supported by an expansion in the nonagricultural sector and mining investment. Cognizant of the negative effects of inflation, particularly on the poor, the authorities also plan to strive to bring inflation down. Sustained donor funding and a stable economy will support the balance of payments and provide the basis for high and inclusive growth.

Strengthening the banking and financial sectors. The authorities have designed and started implementing a comprehensive strategy to strengthen the banking system, to lower fiscal costs associated with Kabul Bank’s failure, and to address governance issues. This strategy includes resolving Kabul Bank, drawing lessons from its failure, promoting transparency, governance and the framework for protecting the financial system from economic crime, as well as addressing moral hazard, and strengthening banking supervision and safeguarding a financial system based on integrity and the rule of law.

Moving toward fiscal sustainability. Fiscal sustainability will depend on sustained increases in revenues together with prioritized spending reflecting development and security priorities. The program envisages an increase in domestic revenues of 0.6 percent of GDP in the next three years. Looking beyond the program period, the planned introduction of a VAT in March 2014 is expected to raise an additional 2 percent of GDP, and the authorities are aiming for a revenue-to-GDP ratio of about 16 percent of GDP by 2017/18.

Prioritizing development spending. In line with the the government’s Afghanistan National Development Strategy (ANDS), which aims at improving the delivery of government services, aligning foreign development assistance with Afghanistan’s national priorities, and channeling more resources through the budget. In particular, although it will be necessary to allocate increasing amounts of spending to security, adequate resources will be allocated to help the poor.

IMF Executive Board Approves US$133.6 Million Arrangement Under the Extended Credit Facility for the Islamic Republic of Afghanistan

IMF: Nicaragua. Seventh Review Under the Extended Credit Facility and Financing Assurances Review

A three-year PRGF (now ECF) arrangement for SDR 71.5 million (55 percent of
quota) was approved on October 5, 2007 and augmented by SDR 6.5 million (5 percent of quota) on  September 11, 2008. The second and third reviews under the ECF arrangement were completed in  November 2009. On November 19, 2010, the Board completed the fourth and fifth reviews of the  ECF and approved an extension of the arrangement through December 4, 2011. The extension entailed a re-phasing of remaining access under the ECF. The 6th review was completed in April 2011 on a lapse-of-time basis. The staff report on the 2010 Article IV consultation was discussed by the Executive Board on July 9, 2010.

Recent developments and outlook. The Nicaraguan economy continued to post robust growth in the first half of 2011, although economic activity and inflation are expected to cool down going forward owing to the weaker global outlook. The deficit in the external current account is projected to remain large and to be financed by resilient capital flows. Strong revenue performance and

expenditure restraint are projected to nearly eliminate the central government deficit in 2011, but the  operating results of public enterprises will be worse than expected.

Main review issues. All quantitative performance criteria for end-June 2011 were met and the  structural agenda is broadly on track. Discussions centered on the macroeconomic outlook and policies for 2011-2012, and on key structural issues, including restoring the electricity sector’s financial sustainability, reforming social security, and enhancing the effectiveness of poverty alleviation measures. Staff urged officials to keep current spending in check in the remainder of  2011.

IMF. Nicaragua. November 14, 2011. Series: Country Report No. 11/322

IMF: Nicaragua. Seventh Review Under the Extended Credit Facility and Financing Assurances Review