Quantitative

Easing
Japan
 • About QE
• Modus Operandi
Table of • Key Targets

Contents • Pros & Cons

• History
• QE in Japan
• Pre-QE Era
• QEs implemented by BoJ
• Conclusion
• Appendix
 About QE
Quantitative Easing is one of the Monetary Policy strategy used by central banks

QE is used to ease the liquidity in the economy wherein the Central Banks buys securities in the market to
increase the money supply and which in turn lowers the interest rate.

This is one of the strong messaging tool used by the central bank to reinstall the confidence indicating the banks
confidence in the financial markets. The central banks invest in the financial instruments (financial assets, like
government and corporate bonds and even stocks), which increases the supply and lowers the interest rates.

This is used as a stimulus to revive the economy and is deployed usually during the financial crisis.
Modus Operandi

This increases ..increases

…to buy bonds
Central Bank demand in the spending and
and other ...employment …Stimulates
Creates capital markets consumption
financial are created.. economy
Money… and lowers the due to lower
assets…
interest rates…. interest rates
Key Objectives / Targets of QE

Boosts
Increases
Promotes
BoostsEconomic
capital liquidity
Growth
Employment
market operations
Increases
Stimulates
Consumer
Production
Stabilizes commoditySpending
prices
QE Pros & Cons
Pros
• Low risk lending for banks, secured
by assets
• Encourages consumption
• Revives confidence
• Boosts the economy

Cons
• May Cause Inflation, or even
Stagflation
• Could cause Asset Bubbles
• May cause income inequality
• Devalued currency
 History of QE
The Bank of Japan has been one of the most ardent champions of quantitative easing,
deploying this policy for more than a decade. It was one of the first users of QE in the year
2001.
However, The wide implementation of QE was during the Global financial crisis and follow-up
recovery between 2007 and 2009.

The European Central Bank and the Bank of England also used QE in the wake of the global
financial crisis that began in 2007.

The Fed began using QE to combat the Great Recession in 2008 and has history of using QE for
three times between 2008-2010, 2010-2011 and 2012-2014. This si excluding the measures
taken during the Pandemic of 2020
QE in Japan
 Pre-QE Era of Japan
• The money stock increased annually by 10.5% during 1986 to 1990. The discount rate
decreased from 5% to 2.5%, encouraging Japanese investors to buy assets in Mainland Asia.
The artificial lower rates resulted in rise in asset prices in Japan creating a bubble
• The bubble burst in 1990s with interest rates rising to 6% from 2.5%. This was followed by slow
economic growth.
• Japan resorted to expansion mechanics like lowering interest rates, printing money and
increasing government deficit.
• The series of rate cuts brought the discount rate to 0.5% by 1995
• This was coupled with aggressive fiscal policy providing nine stimulus packages worth ¥130
trillion
• By 1997, the economy was facing low growth , low interest rates and mounting bad bank loans.
(Between 1995 and 1998, bad loans of ¥50.8 trillion was written off)
• By 2001, the BOJ resorted to QE.
 QE1
• QE was first used by used by the Bank of Japan (BoJ) to fight domestic deflation in the early 2000s. BOJ
had maintained interest rates close to zero.
• BOJ parked large money with the commercial banks leading to excess liquidity and promoting private
lending.
• This was done by buying more government bonds, so the prices increase and in turn the interest rates
decline. The volume of purchases was such that interest rates are at zero
• The scope was later expanded from the government bond to Asset backed securities , equities and
even commercial papers
• The impact of QE was such that current account balances of the banks jumped about 7 times from ¥5
trillion to about ¥35 trillion
• This QE1 was phased until March 2006
 QE2
• The bank had to resort to quantitative easing in October 2010
• With an objective to push down the exchange rate movement (Yen-USD) to protect the domestic
industry and ensure competitive edge in exports, the government announced purchase programme of
¥5 trillion
• Further in August 2011, BOJ announced its plan to increase the current t account balances of the
commercial bank by 25% to ¥50 trillion from ¥40 trillion
• In October 2011, the bank also expanded its asset purchase program to ¥55 trillion
 QE3
• This was the last phase of QE, where the Monetary Base of the bank reached ¥270 trillion and the
interest rates remained low with a target rate of 2.0%
• This was fuelled by the banks announcement to expand its purchasing target by ¥60-70 trillion each
year.
• This programme was very large and aimed to double the money supply
• This was also termed as Abenomics (named after Shinzo Abe, the then Prime Minister of Japan)
• On 31 October 2014, the BOJ announced the expansion of its bond buying program, to purchase ¥80
trillion of bonds a year. Later the scope was expanded to include corporate shares as well as
corporate debt and also ETFs
 • QE has mixed impact on the economy.
Though it helps in lowering the interest
rates, boost the stock prices and boost the
Conclusion economy
• However it leads to stagflation. The QE is
more beneficial to borrowers over the
lenders and investors over the non-
investors.
• In terms of Japan, the QE indeed helped
the country to control the interest rates
and inflation compared to other nations,
while continuing the growth momentum.
Appendix
 • Akinkunmi, Mustapha. “Central Bank Balance Sheet and Real Business
Cycles.” 2018, https://doi.org/10.1515/9781547400577.
• Berkmen, S. Pelin. “Bank of Japan’s Quantitative and Credit Easing: Are
They Now More Effective?” SSRN Electronic Journal, 2012,
https://doi.org/10.2139/ssrn.1997715.
• Jackson, Anna-Louise. “Quantitative Easing Explained.” Forbes, Forbes
Magazine, 18 Mar. 2023,
https://www.forbes.com/advisor/investing/quantitative-easing-qe/.
• “What Is Quantitative Easing? Advantages and Disadvantages of QE -
2023.” MasterClass, https://www.masterclass.com/articles/quantitative-
easing-explained.
• Wieland, Volker. “Quantitative Easing: A Rationale and Some Evidence
from Japan.” NBER, 2009,
https://doi.org/https://www.jstor.org/stable/10.1086/648715.

References