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Unformatted text preview: forward a proposal of delay in voting by the government representative is allowed in the Bank of Japan law. The government motion was overruled by the Board by an 8 to 1 vote. The lifting of the ZIRP was then decided by a 7 to 2 decision. Immediately after the ZIRP was ended, the Japanese economy entered recession. The growth rate in 2000:Q3 turned negative, which was offset to some extent by a brief recovery in 2000:Q4. The peak of the business cycle was later dated as October 2000. As the economy entered recession, the criticism of the Bank of Japans actions increased once more. Many indicators were showing weakness in the last quarter of 2000, and the Bank started to examine ways to ease monetary policy. In February 2001, the Bank introduced the so-called Lombard lending facility and also cut the official discount rate from 0.5 per cent to 0.35 per cent. The Lombard lending facility allowed for automatic lending to banks with collateral at the official discount rate, so that the interest rate would be capped at 0.35 per cent. But the call rate was around 0.20 to 0.25 per cent, and consequently there seemed to be little impact from the introduction of the Lombard facility. A dramatic switch in monetary policy followed. Stage 3. Quantitative easing, phase 1: March 2001March 2003
The MPM of 19 March 2001 turned out to be significant in several respects. First, it effectively restored the ZIRP by adding liquidity to the interbank market for excess reserves. The target interbank rate was lowered immediately to 0.15 per cent, and would be reduced to zero, as conditions warranted. The official discount rate was also cut to 0.25 per cent. Second, the announcement of the instrument switch from the interest rate to the current account balance (the sum of required and excess reserves) at the Bank of Japan suggested that further steps expanding the monetary base, as part of a quantitative easing policy, would be taken in the future if they were considered necessary. Third, the new relaxed monetary policy was to continue until the CPI (excluding fresh food) inflation rate stabilised above zero. The target of the current account was set at 5 trillion yen. However, by targeting an amount beyond required reserves (about 4 trillion yen), it effectively meant that the interbank rate (that is, the call rate) would go to zero, and so it did. Targeting the current account beyond 4 trillion yen meant targeting excess reserves.24
24. In March 2001, before it was adopted, Bank of Japan economist Mr Okina (1999b) reviewed excess reserve targeting as a possible next step in monetary easing. He pointed out a few problems with this option. First, what kind of function can be expected of excess reserves was not known with certainty and was thus identified as a problem. Second, excess reserves was not reliable as an indicator for monetary easing. Third, Dr Okina pointed to an operational hurdle. Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 235 From March 2001 to March 2003, quantitative easing was expanded in several steps. In August 2001, another measure of quantitative easing was employed. The amount of Bank of Japan outright purchases of long-term government bonds was raised from 400 billion yen per month to 600 billion yen per month. At the same time, the current account target was raised to 6 trillion yen (or about 2 trillion yen of excess reserves). In September 2001, the official discount rate was cut to 0.1 per cent, but this did not have any impact given that there was ample liquidity in the form of excess reserves. In December 2001, the monthly purchase of long-term bonds was increased from 600 billion yen to 800 billion yen and the current account target was raised to 1015 trillion yen. In February 2002, the monthly purchase of long-term bonds was increased from 800 billion yen to 1 trillion yen. In October 2002, the monthly purchase of long-term bonds was raised to 1.2 trillion yen, and the current account target was raised to 1520 trillion yen. Stage 4. Quantitative easing, phase 2: March 2003present
In March 2003, at the time of the expiration of terms, a new team of Bank Governor and Deputy Governors was appointed. The new Governor, Mr Fukui, was a former Deputy Governor before he resigned in March 1998. An ex-Ministry of Finance official, Mr Muto, and a professor of economics, Mr Iwata, were appointed as the two Deputy Governors. Mr Iwata was known to have advocated inflation targeting while he was the Director General of the Cabinet Office. Almost from the beginning the new team gave a sign that it would work with the government in fighting deflation: Governor Fukui was sending a message that he would continue the ZIRP for a long period of time. His tone was much more supportive of the ZIRP than his predecessor. The market was thus much more assured of a sustained ZIRP in the future. In his speech to the Japan Society of Monetary Economics, Governor Fukui (2003) explained the effects of the monetary policy framework he inhe...
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This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.