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.
Fernando Gutiérrez del Arroyo González provided excellent statistical support. The views expressed in this note are solely the responsibility of the author and should not be interpreted as reflecting the views of the Bank of Spain.
1 Quantitative Easing (QE) in Japan
After having followed a zero interest rate policy strategy and facing a further deteriorating economy in an environment of falling prices (deflation), the Bank of Japan (BoJ) announced the introduction of QE on 19 March 2001 and kept it in place until 9 March 2006. The Japanese version of QE consisted of the following elements, such as published by the BoJ: 1) Monetary policy target: The current account balances (CABs = required + excess bank reserves) became the operating instrument of Japanese monetary policy, replacing the overnight uncollateralized call rate. Thus, the BoJ moved to an explicit system of reserve targeting with a publicly announced target level of CABs. The initial target for CABs was set at 5 trillion yen, 1 trillion more than the average outstanding balance in February 2001. This target was raised seven times, reaching a target range of 30-35 trillion yen in January 2004. This resulted in a strong expansion of the BoJ’s balance sheet. 2) Instruments: The BoJ announced publicly that it would start to increase the amount of its outright purchases of long-term Japanese government bonds to 400 billion yen per month, which it ultimately enhanced to 1.2 trillion yen per month from November 2002 onwards. In January 2002, the range of bonds to be purchased was broadened from only 10 and 20-year bonds to also include shorter-maturities (2, 4, 5 and 6-year bonds). 3) Commitment horizon: The BoJ publicly committed to keep QE until y-o-y core inflation would turn positive. 2 The implementation of QE in Japan The implementation of QE in Japan can be followed by analyzing the composition of the assets and liabilities sides of the BoJ’s balance sheet. Chart 1 shows the steady increase in the amount of Japanese government...
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