The Exit from Quantitative Easing
The exit from Quantitative Easing (QE): The Japanese experience.1
Adrian van Rixtel
Head International Financial Analysis International Financial Markets Division, Associate Directorate General International Affairs, Bank of Spain
Executive summary • • The exit from QE in Japan was announced in March 2006 and conducted in a well-managed fashion and in just 3-4 months in order not to disrupt financial markets. The exit from QE was primarily conducted by reducing rapidly the most flexible asset on the BoJ’s balance sheet which is the amount of its bills purchases from private banks, to match the rapid decline in the amount of excess reserves. The advantage of this strategy was that the exit of QE was predominantly limited to just one item on the BoJ’s balance sheet and that the balance sheet adjustments were conducted through operations directly with the banking sector, which facilitated the management of the exit process. Intentionally, the BoJ chose to reduce its holdings of Japanese government securities very slowly and moderately in order not to distort supply and demand conditions in Japanese bond markets. In fact, the BoJ kept in place its regular purchases of long-term Japanese government bonds. It realized the gradual reduction of Japanese government securities on its balance sheet mainly by reducing the amount of short-term Japanese government securities. The BoJ implemented certain new liquidity providing operations in order to promote the proper functioning and stability of interbank money markets. The Japanese experience shows that when exiting from QE, a central bank needs to consider very carefully how to restore the functioning of these crucial markets, as one result of QE may be that activity in interbank markets becomes very subdued. All in all, the exit from QE in Japan has been considered a success and its experience may serve as a useful example for other central banks.
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Fernando Gutiérrez del Arroyo González provided
Adrian van Rixtel
Head International Financial Analysis International Financial Markets Division, Associate Directorate General International Affairs, Bank of Spain
Executive summary • • The exit from QE in Japan was announced in March 2006 and conducted in a well-managed fashion and in just 3-4 months in order not to disrupt financial markets. The exit from QE was primarily conducted by reducing rapidly the most flexible asset on the BoJ’s balance sheet which is the amount of its bills purchases from private banks, to match the rapid decline in the amount of excess reserves. The advantage of this strategy was that the exit of QE was predominantly limited to just one item on the BoJ’s balance sheet and that the balance sheet adjustments were conducted through operations directly with the banking sector, which facilitated the management of the exit process. Intentionally, the BoJ chose to reduce its holdings of Japanese government securities very slowly and moderately in order not to distort supply and demand conditions in Japanese bond markets. In fact, the BoJ kept in place its regular purchases of long-term Japanese government bonds. It realized the gradual reduction of Japanese government securities on its balance sheet mainly by reducing the amount of short-term Japanese government securities. The BoJ implemented certain new liquidity providing operations in order to promote the proper functioning and stability of interbank money markets. The Japanese experience shows that when exiting from QE, a central bank needs to consider very carefully how to restore the functioning of these crucial markets, as one result of QE may be that activity in interbank markets becomes very subdued. All in all, the exit from QE in Japan has been considered a success and its experience may serve as a useful example for other central banks.
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Fernando Gutiérrez del Arroyo González provided