Bank of Japans Unconventional Monetary Policy

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In Japan, the supply of money is mainly controlled by the Bank of Japan with the help of monetary policy that is focused on inflation and interest rates. Still, during the past two decades when interest rates were extremely low, unconventional monetary policies were implemented in order to improve the situation. Japan was among the first developed countries that made such a step. And even though the effect of these multidimensional policies on business remains uncovered, they proved to stabilize the financial system. With the help of these policies, the Bank of Japan wanted to cope with postponed deflation. As a result, its independence was challenged because they were mainly oriented on inflation but not deflation¹.

The Bank of Japan wanted to cope with domestic deflation that affected the country greatly. For this purpose, it introduced quantitative easing (QE) on 19 March 2001². Due to the policy, commercial banks faced excess liquidity that reduced the possibility of its shortage. In four years, the balance of accounts was expected to reach 35¥ trillion. Japan believed that it was possible to make the consumer price index stable soon but the country exited from QE only two years later even though it was not initially considered to be so long-lasting.

The policy stimulated the economy greatly but had almost no influence on deflation³. The process of restoring the markets took more than three months. Several years later other countries, such as the US, made a decision to implement QE and followed Japans example.

The beginning of the 21^st century did not bring many positive economic changes for Japan. On the contrary, the currency of the country rose rapidly so that foreign exchange intervention had to be implemented soon after QE. It was developed by the Ministry of Finance in 2003. With this policy, the country wanted to reduce the value of the yen, which was likely to affect the competitiveness of Japanese exports negatively. In less than a year, this intervention amounted to more than 17¥ trillion.

Experts in the sphere considered this foreign exchange intervention to be successful, as the currency could have risen much higher without it. Still, the effects were only temporary and did not allow Japan to restore stability⁴. According to the media, this intervention was considered to be unsterilized. However, this claim was argued by professionals, including Ito⁵, as the Ministry of Finance controlled the dollar purchases. In fact, they did not differ much because of the near-zero short-term interest rates and their impact on the economy⁶.

Equity market intervention was implemented this year. The yen is rising currently and Japan finds it rather complicated to weaken it. Still, this should be maintained because the ability to purchase the Exchange Traded Funds is affected. The equity market intervention was expected to assist in this situation, but no substantial changes are noticed yet. It is claimed that the Bank of Japan will reconsider the situation soon and will allow a good selling opportunity⁷.

Japans interest rates were rather low for a long time, and the country did not seem to be willing to change this situation and until 2010 it mainly remained on the same level close to zero. However, that year, the bank made a decision to reduce its policy interest rate. Being already low (0.1%), it was cut to 0%. Such action was expected to assist in avoiding a recession. Being a developed country, Japan was concerned about its slow growth and considered various ways of coping with this issue.

Still, as the rate was already low, it could not make much effect on the situation. Regardless of this fact, the Bank of Japan treated it as a trigger for continuous attempts to affect the economy and stimulate it⁸.

Negative interest rates were introduced on January 29, 2016⁹. The policy is considered to be a radical plan that was initially treated as a forlorn attempt to improve the economic condition of the country by financial markets. Experts claim that such monetary interventions have an immense influence only when they are implemented for the first time that is why the situation is not likely to alter much currently¹⁰. In the framework of a new policy, the banks that deal with additional reserves will be responsible only for 0.1%. In this way, the Bank of Japan is expecting banks and savers to fund businesses and improve the current economic situation.

The effect observed recently showed that the yen was down for some time, but markets failed to sense substantial changes. However, it is believed that this policy can be a trigger for the markets to make a step forward while banks may face profit reduction for about 10%. As banks in Japan mainly depend on deposits, they can hardly expect the same outcomes other countries had. Analyses revealed that organizations should not expect more than 0.2¥ trillion from borrowing, which is a rather small amount of money. Still, the government should save more than 1¥ trillion by dint of negative interest rates policy implementation.

Bibliography

Bank of Japan cuts interest rates to zero. ihs.com. Web.

Bank of Japan launches negative interest rates. The Guardian. Web.

Cavalo, Elisabetta. A brief history of quantitative easing. Emarketmogul. Web.

Ito, Takatoshi. Is foreign exchange intervention effective? The Japanese experiences in the 1990s. NBER Working Paper 1, no. 8914 (2002): 2.

Okina, Kunio, and Shigenori Shiratsuka. The Illusion of Unsterilized Intervention. frbsf. Web.

Sano, Hideyuki, and Leika Kihara. BOJ launches negative rates, already dubbed a failure by markets. reuters. Web.

Shirakawa, Masaaki. One year under quantitative easing. Imes. Web.

Spiegel, Mark. Japanese foreign exchange intervention. frbsf. Web.

Stanley, Morgan. Time to Sell USD to JPY exchange rate pairing. eFXNews. Web.

Takahashi, Wataru. Japanese monetary policy: Experience from the lost decades. International Journal of Business 18, no. 4 (2013): 227.

Footnotes

Wataru Takahashi, Japanese monetary policy: Experience from the lost decades, International Journal of Business 18, no. 4 (2013): 227.
Masaaki Shirakawa, One year under quantitative easing, Imes. Web.
Elisabetta Cavalo, A brief history of quantitative easing, Emarketmogul. Web.
Mark Spiegel, Japanese foreign exchange intervention, frbsf. Web.
Takatoshi Ito, Is foreign exchange intervention effective? The Japanese experiences in the 1990s, NBER Working Paper 1, no. 8914 (2002): 2.
Kunio Okina and Shigenori Shiratsuka, The Illusion of Unsterilized Intervention, frbsf. Web.
Morgan Stanley, Time to Sell USD to JPY exchange rate pairing, eFXNews. Web.
Bank of Japan cuts interest rates to zero, ihs. Web.
Hideyuki Sano and Leika Kihara, BOJ launches negative rates, already dubbed a failure by markets, reuters. Web.
Bank of Japan launches negative interest rates, The Guardian. Web.

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Bank of Japans Unconventional Monetary Policy

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