Bank of Japan Essay Example for Free

Bank of Japan EssayJapan underwent a decade-long odyssey with deflation and the zero-bound problem. Economic activity in Japan slowed crisply following the collapse of the so strained bubble economy in December 1989, and Japan began to experience deflation by early 1995. During this initial period, while the economy was slowing, forecasters and policymakers consistently underestimated the fulfilment of Japans economic malaise. Consequently, while monetary policy seemed appropriate in terms of the prevailing outlook, the loosening proved woefully inadequate in hindsight.Convinced that Japans economic fundamentals were too severely distressed to be rectified with standard monetary policy measures, on walk 19, 2001 the Bank of Japan announced a new policy of quantitative easing, in an attempt to stimulate the nations stagnant economy. below this policy, the BOJ impr all overd its electric current account target far beyond the level of commercial bank required reserves. This had the expected impact of reducing the already-low overnight call rate effectively to zero. In addition, the BOJ committed to importanttain the policy until the core consumer price index registered stably a zero percent or an increase year on year. Such a policy was unprecedented in the history of central banking in any country.Available Choices and Key DecisionOn March 2006, which is five years after the quantitative easing policy embarked, the issue concern it was bring back to the desk. The Japanese economy was improving at that time and the core consumer price index (CPI) was showing steady growth after years of deflation, one of the predetermined conditions for lifting the policy. As such there was general speculation over the future of the policy. One question arisen Would the current quantitative easing policy persist or would the BOJ return to a normal monetary stance that targeted involvement rates? On March 9th 2006, the central bank made the widely expected decision t o lift the quantitative easing policy.The BOJ as well drew up a preparedness of measures aimed at averting possible market turmoil that could result from lifting the policy. The fit from QF was announced as follows The outstanding ease of current accounts at the Bank of Japan will be reduced towards a level in line with required reserves. the reduction in current account remnant is expected to be carried out over a period of a few months, taking full account of conditions in the short money market. The process will be managed through shot-term money market operations. With respect to the outright purchases of long-term interest-bearing Japanese government bonds, purchases will go on at the current amounts and frequency for somewhat time.Thus, the BOJ make it clear that the reduction of the excess reserves would be conducted through adjustments of its liquidity operations and not by a rapid reduction of its portfolio of Japanese government securities. In fact, the BOJ annou nced that it actually would maintain its outright purchases of long-term Japanese government bonds at the charge per unit of 1.2 trillion yen per month. On the same day the BOJ made its decision, the Japan Investment Council, a ministerial-level panel chaired by Prime Minister Junichiro Koizumi, agreed to set a target of doubling the amount of direct enthronization in Japan by overseas investors to 5% of gross domestic product over the next four years.Personal Decision and ReasonSince the BOJ has supplied extremely ample liquidity with current account balance at the bank as the main operating target and the core consumer price index registered stably a zero percent or an increase year on year as the commitment has already been maintained, the exit from QE is preferred choice that BOJ should make. At that time, exports have continued to increase reflecting the expansion of overseas economies. With respect to domestic private demand, business-fixed investment has also continued to i ncrease against the backdrop of high corporate profits. Meanwhile, the output gap is gradually narrowing. Unit labour costs generally face change downward pressures as wages began to rise amid productivity gains. Furthermore, firms and households are shifting up their expectations fro inflation. In this environment, year-on-year changes in the consumer price index are expected to rest positive.From all the aspects, BOJ had already fulfilled the commitment made when the quantitative easing started to carry out. Therefore, it was time for BOJ to return to a normal monetary stance that targeted interest rates. And the strategy BOJ used when exit from QE was preferred. The advantage was that the exit of QE was predominantly limited to just one item on the BOJs balance sheet and that the balance sheet adjustments were conducted through operations directly with the banking sector, which facilitated the management of the exit process. Since the central bank was set to maintain zero inter est rates for some time, the exit from QE would avoid the undesirable effect of inducing the flow of individual investors duns into high-risk, high-return instruments and avoid the case rise to speculative money games played out in some corners of the real estate and stock markets.Last but not least, the process of exit from QE showed a collaborative relationship between BOJ and the government. It was a good spokesperson for BOJ to maintain a good communication with the government in order to avoid negligent lapses and avoid the distortion to the economy like which happened during the late eighties due to the governments excessive influence over monetary policy. This decision lead BOJ one step forward to banks shore leave from the state. All in all, the exit from QE in Japan had been considered a success and its experience may serve as a useful example for opposite central banks.