Japan’s Economic Stimulus: A Decade of Trial and Error
The Birth of “Quantitative and Qualitative Easing”
In 2013, the Bank of Japan (BOJ) launched an unprecedented stimulus package, dubbed “quantitative and qualitative easing” (QQE), to combat deflation and reach its 2% inflation target. Under Governor Haruhiko Kuroda, the BOJ deployed a massive asset-buying program, which initially showed promise in reversing the strong yen, boosting stock prices, and improving corporate sentiment.
Doubts Emerge
However, less than two years into the program, some BOJ policymakers began to question its effectiveness. In October 2014, the BOJ expanded QQE to prevent slumping oil costs and weak consumption from delaying the achievement of its price goal. But the decision was not unanimous, with a narrow 5-4 vote revealing deep-seated doubts among board members.
A Divided Board
The full account of the deliberations, released recently, reveals a significant number of board members had reservations about the effectiveness of QQE. Some, like Deputy Governor Hiroshi Nakaso, advocated for expanding QQE, citing the need to maintain credibility and prevent a loss of trust in the BOJ’s commitment. Others, such as board member Koji Ishida, voiced concerns about the costs of the stimulus, including the strain on the bond market.
The Psychological Effect
One of the key transmission channels of the policy – shocking the public out of deflation with a huge blow of stimulus – was also scrutinized. While Nakaso believed the impact on public sentiment was crucial, others, like board member Takahide Kiuchi, doubted its effectiveness.
A Decade of Monetary Easing
Despite these reservations, the BOJ continued to implement various monetary easing steps, but failed to keep inflation durably around 2% for another decade. It wasn’t until 2022, largely due to external factors such as the COVID-19 pandemic and Russia’s war in Ukraine, that inflation finally rose above the BOJ’s target.
Reassessing the Stimulus
In December, the BOJ conducted a review of past monetary easing steps and concluded that Kuroda’s stimulus did not change consumer psychology as much as planned. The BOJ has since exited QQE and raised short-term interest rates, marking a significant shift in its monetary policy.
Lessons Learned
The decade-long experiment with QQE serves as a valuable lesson in the complexities of economic stimulus. While the initial results were promising, the long-term effects were less than desired. As the BOJ moves forward under Governor Kazuo Ueda, it is clear that a more nuanced approach to monetary policy is needed to achieve sustainable economic growth.
Leave a Reply