Tuesday, April 7, 2009

Looks like the Bank of Japan is engaged in QE

The Bank of Japan (BoJ) has unleashed a series of measures to tackle tight credit, including the outright purchase of corporate financing instruments. Today, the BoJ expanded the list of eligible collateral on government loans to include municipal bonds issued through public offering (see related NY Times article).

With all of this activity on the BoJ balance sheet, my question is: is the Bank of Japan buying up debt and making loans in order to keep the overnight call rate right at the target 0.1% (the overnight rate is the rough equivalent to the U.S. federal funds rate)? Or is it buying debt in excess of the target through reserve creation, the so-called quantitative easing policy (QE)?

The chart illustrates annual growth of the monetary base and current account balances (essentially bank reserves) in Japan since its last QE period, announced on March 19, 2001. QE BoJ-style includes targeting an elevated level of current account balances by purchasing government debt, as illustrated by the 293% annual growth in current account balances by April 2002.

The BoJ has not announced a QE policy - Governor Masaaki Shirakawa stated on March 25, "I cannot say that we will or will not adopt these policies in the future" - but it sure looks like they've begun. In March, current account balances (data here) grew 69.1% over the year, up from a 14.7% annual growth rate in December 2008.

In 2001 the Bank of Japan announced its intent early, but other central banks (i.e., the Fed) have a bad habit of announcing their intentions well after the policy measures have been put in place.

The chart illustrates annual growth of the monetary base and total banking reserves in the U.S. In December the Fed officially announced its intent to "sustain the size of the Federal Reserve's balance sheet at a high level"; essentially, it announced QE without actually saying it. One month later, Bernanke called it Credit Easing. The point is, reserve balances were already growing at a 141% annual rate in September 2008, three months previous to the Fed's first QE announcement.

Since then, U.S. total reserves - excess plus required - have surged, hitting a 1,937% annual growth rate in January 2009, and the peak might only be local (i.e., the growth rate may rise). The Fed has pledged $7.77 trillion to the financial crisis to date (see this Bloomberg article regarding the actual and pledged cost of the financial rescue), which could more-than triple the size of its current balance sheet.

The Fed case study shows: just because the BoJ hasn't announced QE, that doesn't mean it's not engaged in QE.

Rebecca Wilder

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