Module name: Top up Contemporary of issues in Banking and Finance
ID student: 20055735
Word count: 1093
Inflation influences the global economy, so the market makers in the world decide and
implement the monetary policy paradigm to tackle it. Each central banks have a different method
to control it. According to the Bank of Japan (2013), the foundation of a nation’s economic activity
is price stability, so it is significant for Japan to overcome deflation early and sustain economic
growth. In order to achieve maintainable price stability, the central bank of Japan conducts its
monetary policy framework with a target of 2% for the annual change in the consumer price index.
In order to under the price stability target of 2%, BoJ introduced a comprehensive unconventional
monetary policy tool to achieve price stability: “Quantitative and qualitative monetary easing
(QQE)” based on Yield Curve Control and Inflation-overshooting Commitment.
“Price stability” means a state where households and firms decide to consume and invest
without variations in the general price stage; therefore, BoJ set a goal of 1%. However, a year-onyear change in CPI made Bank replace “the goal of 1%” with “a target at 2%” in 2013. This target
was based on two perspectives. Firstly, the target was set to be consistent with the inflation rate in
Japan’s economy because it was a sustainable basis for improving competitiveness and the growth
of Japan’s economy. By examining the economic activity and price over the next two years, the
market maker in Japan supposed that the price stability target of 2% would significantly increase
the national economy. Secondly, the price stability target of 2% is an essential resilience in the
conduct of monetary policy in Japan after examining various risk factors in the longer term,
typically the impact of financial imbalances.
Figure 1 CPI Inflation from 1990 to 2018
Specifically, according to figure 1, the CPI inflation between 1990 and 2010 witnessed a
significant deflation, being 4 percent to approximately negative 3 percent. According to the
research of UEDA (2011), Japan’s economy has been affected remarkably by a “liquidity trap” for
20 years, beginning in 1990. From 1999 to 2007, BoJ did a zero-interest-rate policy (ZIRP) in the
short term to dispel deflationary concerns, with inflation being around zero. Also, research showed
that BoJ had to use bank reserve as the operating policy target when the IT bubble collapsed in
2001 to increase the price. However, the financial crisis happened during 2008-2009, and a sharp
increase in CPI inflation in 2015 made BoJ change its monetary policy. When deflation affected
the whole economy of Japan led to the central bank switched from a target of price stability at 2%
in 2013; the central bank decided to use the unconventional tool QQE with a new framework for
strengthening quantitative easing.
Figure 2 Transmission Mechanism of QQE Envisioned
QQE was first introduced in April 2013, aiming to expand the monetary policy base to
target massive government bond purchasing. Firstly, QQE was the update of QE, and QQE
monetary policy is needed to boost demand to stabilize prices with a positive output gap in the
medium term. Figure 2 shows the transmission mechanism of QQE, which decreases the nominal
interest rate by purchasing Japanese Government Bonds (JGBs) to raise inflation expectations (at
2%) through monetary easing. So, the real interest rate decreases because of economic activity and
price development improving. It also is no longer experiencing deflation in Japan's economy
because of an improvement in the output gap with increasing inflation expectations.
Additionally, QQE has two components: (1) “yield curve control” controls short and longterm interest rates, (2) “Inflation-overshooting Commitment” expands the monetary base in term
of increasing over 2 percent of CPI inflation rate year-on-year. First, during short-term, current
account balance of financial institution holds negative interest rate of minus 0.1% to the PolicyRate Balances at central bank in 2021 (BoJ, 2021). As a result, it decreases in short-term interest
rate and reduce selling JGBs which hold by financial institution because of increasing current
account. The figure 3 demonstrated that JGB yield curve was low, being under 0.5 percent when
central bank decided to introduce QQE with a negative interest rate. Conversely, in long term BoJ
will purchases JGBs, especially, 10-year JGB yields continues holding around zero percent to
supply funding. Also, the negative interest rate policy dropped 0.2-0.3 percent long-term interest
rate. QQE with negative interest rate has contributed to the flattening of the yield curve. Typically,
the number of JGBs acquiring, the central bank does transaction buying more or less in line with
the current pace, being about 80 trillion yen to achieve the long-term interest rate target. To let
smoothy, BoJ purchases absolutely all JGBs with fixed-rate purchase by them.
Figure 3 Change in the JGB yield curve
The second component is the “inflation-overshooting committee”. BoJ will continue with
“QQE with Yield Curve Control” to a stable price at 2%. When the market maker expands the
monetary base policy, Bank could control CPI inflation at 2%. Meanwhile, during the short run,
the interest rate in the monetary policy base might oscillate to discipline the yield curve in financial
markets. Achieving the Bank of Japan’s “price stability at 2% target by using QQE” has been
proven by Anand, Hong and Hul (2019) based on Quarterly Projection Model (QPM1). The
research shows that the unconventional tool used by BoJ is good at controlling inflation, but BoJ
should have more reserves for a bad situation.
14000000
12000000
10000000
8000000
6000000
4000000
2000000
2010/01
2010/06
2010/11
2011/04
2011/09
2012/02
2012/07
2012/12
2013/05
2013/10
2014/03
2014/08
2015/01
2015/06
2015/11
2016/04
2016/09
2017/02
2017/07
2017/12
2018/05
2018/10
2019/03
2019/08
2020/01
2020/06
2020/11
2021/04
2021/09
2022/02
2022/07
0
Japanese Government Securities (Assets)
Total (Assets, or Liabilities and Net Assets)
Figure 4 the Securities and Total Asset/Liabilities
Doing “QQE with Yield Curve Control” effect significantly on Assets and Liabilities in
the balance sheet, especially Securities of BoJ and Non-performing Loans. It witnessed an increase
significantly in Securities from 725,539 to 5,614,526 thousand Yen from 01/2010 to 07/2022.
Also, a similar trend was Assets/Liabilities, being 1,132,336 to 7,386,915 thousand Yen.
Moreover, the research of Ryuzo, Okimoto and Rieti (2017) showed that the QQE regime affected
the macroeconomic, for example, stock prices, exchange rates, interest rate channels and asset
prices. A declining interest rate forces higher asset prices, a credit advance, increasing securities,
1
QPM for Japan is a semi-structural gap model, which is based on the New-Keynesian paradigm and has
characteristics explicitly derived from microeconomic foundations
and a decrease in currency because of the more current account. Furthermore, the challenge of BoJ
is a decline in bank loans to maintain productivity and profitability in the corporate sector. QQE
affects the expansionary monetary base generating more.
In conclusion, bank of Japan aimed price stabilities target at 2% with unconventional QQE
tool to control inflation. However, this tool has effect on the macroeconomic creating challenges
for Bank of Japan. Therefore, BoJ has always adapted.
References:
1. Anand, R., Hong, G.H. and Hul, Y. (2019). Achieving the Bank of Japan’s Inflation
Target. SSRN Electronic Journal. doi:10.2139/ssrn.3496707.
2. Bank of Japan (2013a). Cabinet Office Ministry of Finance Bank of Japan Joint
Statement of the Government and the Bank of Japan on Overcoming Deflation and
Achieving Sustainable Economic Growth. [online] Available at:
https://www.boj.or.jp/en/announcements/release_2013/k130122c.pdf.
3. Bank of Japan (2013b). Introduction of the ‘Quantitative and Qualitative Monetary
Easing’ (Announced at 1:40 p.m.). [online] Available at:
https://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf.
4. Bank of Japan (2013c). The ‘Price Stability Target’ under the Framework for the
Conduct of Monetary Policy. [online] Available at:
https://www.boj.or.jp/en/announcements/release_2013/k130122b.pdf [Accessed 14 Dec.
2022].
5. Bank of Japan (2014). Expansion of the Quantitative and Qualitative Monetary Easing
(Announced at 1:44 p.m.). [online] Available at:
https://www.boj.or.jp/en/announcements/release_2014/k141031a.pdf.
6. Bank of Japan (2016a). Bank of Japan New Framework for Strengthening Monetary
Easing: ‘Quantitative and Qualitative Monetary Easing with Yield Curve Control’.
[online] Available at:
https://www.boj.or.jp/en/announcements/release_2016/k160921a.pdf [Accessed 14 Dec.
2022].
7. Bank of Japan (2016b). Comprehensive Assessment: Developments in Economic Activity
and Prices as well as Policy Effects since the Introduction of Quantitative and
Qualitative Monetary Easing (QQE). [online] Available at:
https://www.boj.or.jp/en/announcements/release_2016/rel160930d.pdf [Accessed 14 Dec.
2022].
8. Bank of Japan (2016c). Introduction of ‘Quantitative and Qualitative Monetary Easing
with a Negative Interest Rate’. [online] Available at:
https://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf.
9. Bank of Japan (2018). Strengthening the Framework for Continuous Powerful Monetary
Easing. [online] Available at:
https://www.boj.or.jp/en/announcements/release_2018/k180731a.pdf [Accessed 14 Dec.
2022].
10. Bank of Japan (2021). Bank of Japan Further Effective and Sustainable Monetary Easing
1. Assessment for Further Effective and Sustainable Monetary Easing At the Monetary
Policy Meeting held today, the Bank of Japan conducted an assessment for. [online]
Available at: https://www.boj.or.jp/en/announcements/release_2021/k210319a.pdf
[Accessed 14 Dec. 2022].
11. Iwata, K. and Takenaka, S. (2014). Central bank balance sheet expansion: Japan’s
experience. [online] Available at: https://www.bis.org/publ/bppdf/bispap66g.pdf.
12. Ryuzo, M., Okimoto, T. and Rieti (2017). The Macroeconomic Effects of Japan’s
Unconventional Monetary Policies. RIETI Discussion Paper Series.
13. UEDA, K. (2011). THE EFFECTIVENESS OF NON-TRADITIONAL MONETARY
POLICY MEASURES: THE CASE OF THE BANK OF JAPAN*. Japanese Economic
Review, 63(1), pp.1–22. doi:10.1111/j.1468-5876.2011.00547.x.