What is Japan's quantitative easing?
( Source: Reuter) The Bank of Japan ended a five-year-old
experiment with ultra-loose "quantitative easing" monetary policy
on Thursday and returned to a conventional interest rate regime,
but it said short-term rates would be kept around zero for now.
Following are some questions and answers about quantitative
easing.
Q. When did the BOJ start it, and why?
A. The BOJ adopted quantitative easing in March 2001 to
arrest two years of price falls and support a deteriorating
economy by going beyond just keeping interest rates at zero.
Many experts, including some within the BOJ, are sceptical
whether the policy had any direct effect in boosting the economy,
but most agree it helped prevent deflation from spiralling out of
control by averting a banking crisis.
The extra fund cushion meant banks, burdened with massive
nonperforming loans, avoided a liquidity crunch and were able to
take bolder steps in cleaning up their loan portfolios.
Q. How did quantitative easing work?
A. Instead of a traditional policy of raising or cutting
short-term interest rates, the BOJ set a target for the amount of
money it force-fed into the banking system.
The funds were injected mainly through the BOJ's purchases of
government and commercial securities from banks.
The abundance of funds was measured by the balance of current
account deposits that financial institutions park at the central
bank. The target was 30-35 trillion yen ($255-$297 billion) --
five to six times the legally required reserves.
As a result, the benchmark overnight call rate in the
interbank money market has been pinned at about 0.001 percent.
The BOJ also buys 1.2 trillion yen worth of government bonds
in the market each month, which it will continue to do for now.
The bond-buying, combined with the BOJ's promise to stick to
quantitative easing until consumer price deflation is eradicated,
had capped bond yields, with the 10-year yield falling to a
record low of 0.43 percent in 2003.
Q. Why does the BOJ want to stop it now?
A. Providing huge amounts of free money when the economy is
heating up could spur inflation and cause bubbles in the stock
and real estate markets. The BOJ would also have little room for
further policy manoeuvres if the economy slows down again.
The core consumer price index rose 0.5 percent from a year
earlier in January, after 0.1 percent rises in the previous two
months -- just about meeting the definition of a sustained rise
that the BOJ had cited as a condition for ending the policy.
Q. Why do politicians want it to stay?
A. Prime Minister Junichiro Koizumi said the government and
the BOJ cannot afford to derail Japan's hard-won economic
recovery. Soon after the BOJ ended an 18-month-long zero interest
rate policy in August 2000, the economy slipped into recession.
While that was due mainly to the end of the global dot-com
bubble, the BOJ also took the heat.
The government is also wary that an eventual rise in interest
rates -- the next step after the end of quantitative easing --
could upset the bond market. Higher bond yields would raise the
government's borrowing costs and hurt its attempts to trim public
debt, which now stands at 150 percent of gross domestic product.
Q. What comes next?
A. The end of quantitative easing is the first step towards
higher short-term interest rates -- but that won't happen
immediately. The BOJ said it will keep rates near zero for now.
Initially, the overnight call rate will stay below 0.1
percent -- the official discount rate, at which banks can borrow
from the BOJ if the market rate goes higher.
But at the same time, the BOJ will mop up surplus funds in
the system, bringing down the current account deposit balance
towards the legally required reserve level of about 6 trillion
yen. Analysts say the process could take three to six months.
A Reuters poll last week showed more than half of the market
experts surveyed expected the BOJ to raise interest rates by 0.25
percentage point by the end of this year.
($1=117.57 yen)
experiment with ultra-loose "quantitative easing" monetary policy
on Thursday and returned to a conventional interest rate regime,
but it said short-term rates would be kept around zero for now.
Following are some questions and answers about quantitative
easing.
Q. When did the BOJ start it, and why?
A. The BOJ adopted quantitative easing in March 2001 to
arrest two years of price falls and support a deteriorating
economy by going beyond just keeping interest rates at zero.
Many experts, including some within the BOJ, are sceptical
whether the policy had any direct effect in boosting the economy,
but most agree it helped prevent deflation from spiralling out of
control by averting a banking crisis.
The extra fund cushion meant banks, burdened with massive
nonperforming loans, avoided a liquidity crunch and were able to
take bolder steps in cleaning up their loan portfolios.
Q. How did quantitative easing work?
A. Instead of a traditional policy of raising or cutting
short-term interest rates, the BOJ set a target for the amount of
money it force-fed into the banking system.
The funds were injected mainly through the BOJ's purchases of
government and commercial securities from banks.
The abundance of funds was measured by the balance of current
account deposits that financial institutions park at the central
bank. The target was 30-35 trillion yen ($255-$297 billion) --
five to six times the legally required reserves.
As a result, the benchmark overnight call rate in the
interbank money market has been pinned at about 0.001 percent.
The BOJ also buys 1.2 trillion yen worth of government bonds
in the market each month, which it will continue to do for now.
The bond-buying, combined with the BOJ's promise to stick to
quantitative easing until consumer price deflation is eradicated,
had capped bond yields, with the 10-year yield falling to a
record low of 0.43 percent in 2003.
Q. Why does the BOJ want to stop it now?
A. Providing huge amounts of free money when the economy is
heating up could spur inflation and cause bubbles in the stock
and real estate markets. The BOJ would also have little room for
further policy manoeuvres if the economy slows down again.
The core consumer price index rose 0.5 percent from a year
earlier in January, after 0.1 percent rises in the previous two
months -- just about meeting the definition of a sustained rise
that the BOJ had cited as a condition for ending the policy.
Q. Why do politicians want it to stay?
A. Prime Minister Junichiro Koizumi said the government and
the BOJ cannot afford to derail Japan's hard-won economic
recovery. Soon after the BOJ ended an 18-month-long zero interest
rate policy in August 2000, the economy slipped into recession.
While that was due mainly to the end of the global dot-com
bubble, the BOJ also took the heat.
The government is also wary that an eventual rise in interest
rates -- the next step after the end of quantitative easing --
could upset the bond market. Higher bond yields would raise the
government's borrowing costs and hurt its attempts to trim public
debt, which now stands at 150 percent of gross domestic product.
Q. What comes next?
A. The end of quantitative easing is the first step towards
higher short-term interest rates -- but that won't happen
immediately. The BOJ said it will keep rates near zero for now.
Initially, the overnight call rate will stay below 0.1
percent -- the official discount rate, at which banks can borrow
from the BOJ if the market rate goes higher.
But at the same time, the BOJ will mop up surplus funds in
the system, bringing down the current account deposit balance
towards the legally required reserve level of about 6 trillion
yen. Analysts say the process could take three to six months.
A Reuters poll last week showed more than half of the market
experts surveyed expected the BOJ to raise interest rates by 0.25
percentage point by the end of this year.
($1=117.57 yen)
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