Quantitative Easing and Its Impact in the US, Japan, the UK and Europe by Kjell Hausken & Mthuli Ncube

Author:Kjell Hausken & Mthuli Ncube
Language: eng
Format: epub
Publisher: Springer New York, New York, NY

At the end of 2012, Mr. Shinzo Abe takes office as the new Prime Minister of Japan. He urges the BOJ to take more decisive and effective policy steps to stem the continuous price decline and the sluggish private investment and spending which are generally regarded as the causes of the stagnant Japanese economy over the last 2 decades. His plan which combines aggressive central bank easing as well as large government spending is dubbed “Abenomics.” Under the pressure from the new government, the BOJ decides to provide additional monetary accommodation by setting a higher price stability target and extending its APP indefinitely.16 More specifically, the price stability target is set at 2 % in terms of the year-on-year rate of change in CPI, and the APP is set to be on an ongoing basis without any termination date from 2014. Prime Minister Shinzo Abe describes these policy innovations as a “regime change.” The market, however, does not respond to this “regime change” strongly. JGB yields remain roughly unchanged across the board, and OIS rates only decline moderately at 20-year maturity. Prime Minister Shinzo Abe’s first attempt, therefore, fails to bring interest rates further down.

Empirical evidence accumulated over the large set of CME-related events show that the CME program is effective in lowering interest rates at intermediate term with maturities between 5 and 10 years. Marginal decline in interest rates is also found for JGBs with shorter maturities. In contrast, longer-term JGB yields increase cumulatively over the set of CME-related events. This is largely attributable to the fact that the assets acquired under the APP focus mainly on those with shorter maturities. Moreover, looking at the series of CME-related events suggests that adjusting policy measures bit by bit is unlikely to affect market interest rates effectively. Even the fairly radical changes in monetary policy under “Abenomics” fail to bring interest rates further down. Therefore, innovative ways of thinking about the design and conduct of monetary policy are clearly needed. Besides, the decomposition of changes in interest rates suggests that the decline in shorter- and medium-term JGB yields over the set of CME-related events is more likely to be attributable to the decrease in OIS rates through the signaling channel.

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