Hiroshi UgaiBack to index

  • Transmission Channels and Welfare Implications of Unconventional Monetary Easing Policy in Japan


    This paper examines the effects of the Quantitative and Qualitative Monetary Easing Policy (QQE <2013-current>) of the Bank of Japan (BOJ) by transmission channels in comparison with those of the Comprehensive Monetary Easing Policy (CE) and the subsequent monetary easing policies (2010-2012), based on the event study using financial market data. As for the QQE under normal market conditions, depreciation of foreign exchange rate in the context of portfolio balance channel functions quite strongly, while as for the CE, signaling channel through the commitment and credit easing channel at the dysfunctional markets work. The direct inflation expectation channel is weak for both QQE and CE, although the QQE has adopted various ways to exert a direct and strong influence on inflation expectation. It can be conjectured that the gradual rise in inflation expectation comes mainly from other channels like the depreciation of the yen. The most crucial characteristic of the QQE is to maximize the potential effects of easing policy by explicitly doubling and later tripling the purchased amount of JGBs and then the monetary base proportionally. The amount of JGB purchases by the BOJ surpasses the issuance amount of JGBs, thereby reducing the outstanding amount of JGBs in the markets. Shortage of safety assets would increase the convenience yield, which itself would reduce the economic welfare and not permeate the yields of other risky assets theoretically. This paper then examines the impact of reduction in JGBs on yield spreads between corporate bonds and JGBs based on money-in-utility type model applied to JGBs, and finds that at least severe scarcity situations of JGBs as safe assets are avoided, since the size of Japan’s public debt outstanding is the largest in the world. Even so, the event study shows no clear evidence that the decline in the yield of long-maturity JGBs induced by the QQE permeates the yields of corporate bonds. Recently demands for JGBs have been increasing from both domestic and foreign investors as collaterals after the Global Financial Crisis and from financial institutions that have to correspond to strengthened global liquidity regulation, while the Government of Japan is planning to consolidate the public debts. These recent changes as well as market expectation for future path of JGB amounts should also be taken account of to examine the scarcity of safe assets in case of further massive purchases of JGBs.


    Facing the zero lower bound of short-term interest rate, the Bank of Japan (BOJ) conducted the Quantitative Easing Monetary Policy (QEP) from 2001 to 2006, well in advance of other developing countries. At that time there were heated discussions about its effects (Ugai (2007)). After the Global Financial Crisis (GFC) in 2008, most of the major central banks have also faced the zero interest rate lower bound (Graph 1), and the Federal Reserve pursued the Large Scale Asset Purchases (LSAPs), followed by the Bank of England and the BOJ. Recently, although the Federal Reserve has terminated the LSAP, European Central Bank has newly adopted unconventional monetary policy including an expanded asset purchase program. Although researchers have started to summarize the effects and side-effects of these unconventional monetary easing policies theoretically and empirically (IMF (2013)), there is no consensus about them so far.