FRBSF: Did Quantitative Easing by the Bank of Japan Work?

The San Francisco Fed has an Economic Letter assessing of the Bank of Japan's policy of quantitative easing from 2001 to 2006. Here's the introduction and conclusion to the study:

Did Quantitative Easing by the Bank of Japan "Work"?, by Mark M. Spiegel Vice, FRBSF Economic Letter: On March 19, 2001, the Bank of Japan (BOJ) embarked on an unprecedented monetary policy experiment, commonly referred to as "quantitative easing," in an attempt to stimulate the nation's stagnant economy.

Under this policy, the BOJ increased its target for "current account balances" of commercial banks at the BOJ far in excess of their required reserve levels. This had the expected impact of reducing the already low overnight call rate (which is roughly equivalent to ... the federal funds rate) effectively to zero. In addition, the BOJ committed to maintain the policy until the core consumer price index registered "stably" a 0% or a positive increase year on year. The policy was lifted five years later, in March 2006. At the launch of the program, many were skeptical that it would have any impact on the real economy, as overnight interest rates were already close to zero, so flooding Japanese commercial banks with excess reserves would only amount to a swap of two assets with close to zero yields.

Now that the program has been lifted, several studies have attempted to assess its impact through a number of channels. These include a direct effect of increases in current account balances, an impact on the expectations of market participants, increased central bank purchases of long-term Japanese government bonds (JGBs) that would reduce long-term interest rates, and an encouragement of greater risk-tolerance in the Japanese financial system....

Conclusion The results ... are just now making their way into the literature, but several patterns already have emerged. First, the primary evidence for the real effects of quantitative easing appears to be associated with ... some measurable declines in longer-term interest rates. These have been associated with both changes in agents' expectations of future interest rate levels and with purchases of "nonstandard" assets, such as longer-term JGBs. As these policies often occurred simultaneously, it is difficult to discriminate between the two. Second, there appears to be evidence that the program aided weaker Japanese banks and generally encouraged greater risk-tolerance in the Japanese financial system.

While these outcomes appear to be consistent with the intentions of the program, the magnitudes of these impacts are still very uncertain. Moreover, in strengthening the performance of the weakest Japanese banks, quantitative easing may have had the undesired impact of delaying structural reform.

Comments

[calmo]

I do think this BoJ "quantitative easing" is an important issue, so I'm a tad underwhelmed that this piece concludes: too early to tell. [btw, I'm distracted by the biography that lists the Japanese teams of authors and the stand alone American author who obviously can think for himself.]
Here's what I really want to know about this San Fransisco Reserve bank piece: did he deliberately go out of his way to avoid Japan's intervention in the fx market, the continuing carry trade and the effects on American finance or was it just an academic accident?

[slink/js paine]

this looks rather small poatos to me mark

my guess it was a vailed case
of
central bankers setting up
a contigency plan
for automatic
bailing out
of stressed weak banks
but the contingency never hit

[Ralph Musgrave.]

The non-effect of quantitative easing is easily explained. Securities are chunks of wealth that the owners thereof regard as SAVINGS. Savings are chunks of wealth that the owners do not intend spending: that is the definition of the word "Savings". Thus if someone induces security owners to convert their securities to cash, that cash will tend not get spent. It will tend to get dumped in a deposit account. Hence the effect of quantitative easing on demand is likely to be around zero.
Doubtless there will be one or two exceptions or qualifications to the above rule. One would be where the basic cause of insufficient demand is a banking sector which is bust and which is not lending as per normal (sound familiar as of 2008?). In this case if government "quantitively eased" banks' dodgy assets, then I would expect demand to rise and possibly return to normal (more or less what Hank Paulson tried).
Also to the extent that a government prints money and offers security owners cash for their securities over and above the market price of same, this represents (in the eyes of security owners) a real increase in their paper wealth. A portion of this new found wealth WILL be spent, and hence raise demand. But this is a minor effect. Moreover, why go to the fuss and bother of purchasing wheel barrows full of securities when the only real effect comes from increasing the population’s paper wealth? A simpler way of doing the latter would be to run an unfunded budget deficit.