Magazine article Economic Trends

Japan Ends Quantitative Easing

Magazine article Economic Trends

Japan Ends Quantitative Easing

Article excerpt

The Japanese economy may finally be awakening from its big sleep. Economic activity has picked up, the banking sector is strengthening, and overall confidence in the country's economic prospects is growing. The good news includes data suggesting that Japan's nearly eight-year stretch of price deflation is ending. Japan's core CPI (less fresh food) increased 0.6% on a year-over-year basis in January after gains of 0.1% in December and November. In response to the favorable price pattern, the Bank of Japan announced, on March 9, 2006, that it was ending its quantitative easing policy.

Under this policy, the Bank of Japan set a target for current account balances--essentially non-interest-earning reserve deposits that financial institutions maintain at the Bank of Japan--and purchased government securities and commercial bills until they hit the objective. Over the past two years, the target has been [yen] 30--[yen] 35 trillion, substantially more than the [yen]6 trillion in required reserves that Japanese banks must hold against their deposit liabilities.

The Bank of Japan adopted its policy of quantitative easing in March 2001 to convince markets that it would end price deflation and to boost depositors' confidence in the financially distressed banking sector. After 1999, when overnight interest rates hit zero and prices generally started falling, short-term interest rates were no longer an effective operating target for monetary policy. …

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