Bank of Japan Quantitative Easing Then and Now
December 18, 2008
The Fed’s interest rate is now effectively zero, and the the operational target has shifted to quantitative criteria that can be monitored by rapid growth in its balance sheet. The Bank of Japan’ s two-day policy meeting will likely end with an announcement tonight of a target rate cut of 20 basis points to 0.1% and/or new steps to bolster money and credit. Other central banks seem headed for what economists call quantitative monetary stimulus, too, so interest has piqued over Japan’s experience with quantitative targeting from March 2001 to March 2006.
Japanese overnight money rates had already been at 0.5% or lower since September 1995, including a spell of ZIRP (zero interest rates) from March 1999 until August 2000. A total Y 4 trillion of bank reserves at the Bank of Japan was sufficient before March 2001 to pin interest rates at zero. In March 2001, the BOJ shifted its policy from interest rates, which had been cut to zero the month before, to reserve balances held with it. Besides raising that target, the central bank also lifted the amount of Japanese government bonds (JGB’s) that it would purchase outright each month. Here’s the progression of increasingly looser, quantitatively-oriented, policy changes pursued by the BOJ for the five years between March 2001 and March 2006.
- March 2001: lifted the reserve target by Yen 1 trillion to Y 5 trillion ( about $41.7 bn).
- August 2001: lifted reserves to Y 6 trillion and raised JGB purchases to Y 600 bn per month from Y 400 bn.
- September 2001: set the reserves target at “more than Y 6 trillion.”
- December 2001: established a range target for reserves of Y 10-15 trillion and lifted monthly JGB buying to Y 800 bn.
- February 2002: lifted monthly buying of JGB’s to Y 1.0 trillion.
- October 2002: raised the target range for reserves to Y 15-20 trillion and monthly JGB buying to Y 1.2 tln, which is still the level used.
- April 1, 2003: lifted the reserves target to a range of Y 17-22 trillion.
- April 30, 2003: lifted the reserves target for the second time in a month to Y 22-27 trillion.
- May 2003: raised the reserves target to Y 27-30 trillion.
- October 2003: modified the reserves target to Y 27-32 trillion.
- January 2004: raised the target range for reserves to Y 30-35 tln (about $285-330 billion).
The Bank of Japan abolished quantitative targets in March 2006, and excess bank reserves were removed rapidly from the system during 2Q06. In mid-July of that year, the overnight money rate target was raised to 0.25%, and the discount rate was increased 30 basis points to 0.4%. A second round of rate hikes was implemented in February to 0.5% on overnight money and 0.75% on the penalty rate. Policy then stood still until this past October 31st, when the overnight rate was cut 20 basis points to 0.30% and the penalty rate was lowered to 0.5%. More easing awaits tonight’s announcement.
The five key dates in this chronology were September 1995 when rates fell enduringly to 0.5% or less, March 1999 when the first episode of ZIRP began, March 2001 when quantitative targets were adopted, March 2006 when those targets were ended and policy reverted to an interest rate orientation, and October 2008 when the BOJ reluctantly reduced rates again. Japanese monetary officials claim that quantitative easing produced as much harm as benefit, specifically that such did not stimulate growth until the latter stages of use and that prolonged zero interest rates damaged money market functionality in some permanent ways. The sole benefits were stopping deflation from spiraling downward and enabling banks to dispose of their bad loans and eventually return to a healthy profit stream. The table below documents values of the dollar/yen, on-year CPI inflation, on-year GDP growth, on-year money growth, and the approximate yield on ten-year government bonds in Japan at the key dates and compares such to present levels.
| Yen | CPI | GDP | Money | JGB’s | |
| 09/95 | 98 | -0.4% | 0.8% | 3.6% | 3.00% |
| 03/99 | 122 | -0.4% | -0.3% | 3.7% | 1.75% |
| 03/01 | 120 | -0.4% | 2.0% | 2.5% | 1.15% |
| 03/06 | 119 | -0.2% | 2.5% | 1.5% | 1.60% |
| 10/08 | 98 | 2.1% | 0.7% | 2.1% | 1.50% |
| 12/08 | 89 | 1.7% | 0.5% | 2.2% | 1.27% |
Japan never again resembled its prior self. Real economic growth in the thirteen since September 1995 averaged only 1.1% per annum. Before the 1990’s, growth weaker than 3% had been considered a recession in Japan. Money and credit growth remained very low throughout quantitative easing, and consumer price inflation basically returned to the black only because of higher commodity prices. The yen weakened during quantitative easing, and the growth enjoyed by Japan earlier in the current decade was heavily stoked by export demand, which was buoyed by the strength of China as well as a cheapened currency. All in all, Japan’s results were meager and not self-sustaining. The yen is again trading near record highs, and Japan remained extremely susceptible to a global recession that has now struck. Bank health has also suffered lately, as global strains spilled over. Ten-year JGB yields, which averaged 5.13% over the eight years prior to September 1995, also failed to return to any semblance of their past and instead continue to suffer from perceived risks of future deflation and depressed expected growth.
Japan’s experience has been distinctly different from the post-great depression experience of the United States and others. The United States reverted to its former economic strength in every way. Japan appears permanently disabled. Like Japan, the United States now will be running up enormous fiscal liabilities, but quantitative easing is being tried at an earlier stage in the U.S. than Japan. Whether that initial delay on monetary policy was Japan’s fatal error, nobody can be sure. Maybe the problem was the sequential attempts at
fiscal stimulus and then quantitative monetary easing rather than administering both simultaneously. But just possibly, Japan before and the United States now have something critical in common, and the United States will fall into the same trap that Japan did. The pundits have been wrong on forecasting the banking crisis too many times since August 2007 to be confident that anybody really can foretell where this story is leading.
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[…] own Policy Board. A review of the chronology of the Japanese experience can be found in a a December 18, 2008 posting on this weblog. Unfortunately, there are not many good precedents to gain guidance for the contemporary […]