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Unformatted text preview: rited in a way that was much closer to mainstream economists thinking outside the Bank of Japan. The increase in the quantitative easing was aimed at the portfolio balance effect:
[as] the marginal value of liquidity services became zero, people would start to rebalance their portfolios by investing in assets with higher marginal values whether these were real or financial assets, if the Bank increased further its position of liquidity. The aim of this process was thus to generate positive economic momentum, acting, for example, to push up asset prices. So far, however, the effect has not been widely observed. This is quite consistent with the view outside the Bank, but different from discussions in the Policy Board under the previous regime, in which even the slightest inflation was considered to be bad because, by helping debtors, it delayed structural reform. Governor Fukui also described the increase in long-term bonds as a successful operation, contributing to the smooth implementation of quantitative easing. He also explained the commitment to continuing the ZIRP and quantitative easing as a strong one, because even if the future inflation rate was expected to be positive, the ZIRP would continue as long as the current CPI (excluding fresh food) inflation rate is below zero. Considering the lag in the effects of monetary policy, he suggested that 236 Takatoshi Ito the policy could end up tolerating inflation. This kind of presentation also sounds close to what was being advocated by supporters of inflation targeting, although Governor Fukui stopped short of embracing inflation targeting. After Mr Fukui became Governor, the target amount of the current account was raised in several steps, to 3035 trillion between March 2003 and January 2004. In October 2003, the Board elaborated on the two necessary conditions to end the ZIRP. Essentially, these are: (1) the CPI (excluding fresh food) inflation rate is zero per cent or above as a trend for a few months; and (2), the prospective CPI is not expected to be below zero per cent according to forecasts of many Policy Board members.25 In the next few sub-sections, the changes in monetary policy actions are summarised according to the instruments of monetary policy. 2.4 Quantitative easing and unconventional monetary policy As mentioned above, the Bank adopted quantitative easing in March 2001, and increased its amount of outright purchases of long-term government bonds. The monthly purchase was raised from 400 billion yen before March 2001, to 1.2 trillion yen in October 2002. It is somewhat remarkable that Governor Hayami, who seemed to have opposed easing and also led the move to lift the ZIRP in August 2000, had changed the position and implemented the increase in government bond purchases after March 2001. Although excess reserve targeting was introduced in March 2001, it was increased from 5 trillion to 1520 trillion in October 2002. Most of the jump in excess reserves came under Governor Fukuis leadership after March 2003. The measures of long-bond purchases and the Bank of Japans target for current account balances are summarised in Figure 4. The chart shows the increase in purchases of long-term bonds and the current account balances target over time. In terms of the two options of increasing the purchase of long bonds and increasing excess reserves, the former is believed to have an immediate impact on the economy, through lowering (or preventing the increase in) the long-term interest rate, and forcing portfolio shifts among private-sector investors. An increase in the purchase of long bonds had been implemented between April 2001 and October 2002, the
25. The announcement on 10 October 2003 read as follows: With the aim of laying the foundation for sustainable growth of Japans economy, the Bank is currently committed to maintaining the quantitative easing policy until the consumer price index (excluding fresh food, on a nationwide basis, hereafter the core CPI) registers stably a zero per cent or an increase year on year. Such commitment is underpinned by the following two conditions. [Para] First, it requires not only that the most recently published core CPI should register a zero per cent or above, but also that such tendency should be confirmed over a few months. [Para] Second, the Bank needs to be convinced that the prospective core CPI will not be expected to register below a zero per cent. This point will be described in such materials as the analysis and the forecasts of Policy Board members in the Outlook Report. To be more specific, many Policy Board members need to make the forecasts that the core CPI will register above a zero per cent during the forecasting period. [Para] The above conditions are the necessary condition. There may be cases, however, that the Bank will judge it appropriate to continue with quantitative easing even if these two conditions are fulfilled. Calling the CPI excluding fresh food as the core CPI may be misleading because it s...
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.