Unconventional Monetary Policy in Practice. A Comparison of 'Quantitative Easing' in Japan and the USA

Diploma Thesis , 2009 , 105 Pages , Grade: 1

Economics - Finance

In the current economic and financial crisis, many western central banks introduced “unconventional” monetary policy measures, commonly referred to as “Quantitative Easing (QE)”. However, the Bank of Japan (BoJ) already applied QE between 2001 and 2006. This lead many commentators to make oversimplifying comparisons between the BoJ’s QE approach (2001-2006) and current implementations of QE by other central banks.

In particular, this diploma thesis tries to examine the differences between BoJ-type QE and Fedtype QE. It turns out that both approaches differ fundamentally from each other on various grounds: The primary aim of QE in Japan was fighting deflation, whereas the American central bank addresses mostly strains in the banking system. Concerning the concrete measures, one can say that QE by the BoJ consisted to a good deal of active QE in terms of outright purchases of Japanese government securities (JGBs), whereas the Fed currently follows a somewhat broader approach: Since interbank markets are not functioning as desired, it tries to engage with as many market participants as direct as possible. Therefore the Fed has introduced a much broader range of new instruments than its Japanese counterpart did between 2001 and 2006. As a result, the Fed’s balance sheet expansion was considerably larger than the one in Japan.

Inhaltsverzeichnis (Table of Contents)

• Introduction
• "Conventional" Monetary Policy Instruments
  • Open Market Operations
    • Outright Transactions
      • USA
      • Japan
    • (Reverse) Repurchase Agreements
      • USA
      • Japan
  • Standing Facilities
    • USA
    • Japan
  • Reserve Requirements
    • USA
    • Japan
• The Macroeconomic and Financial Conditions prior to the Introduction of Quantitative Easing
  • USA
  • Japan
• Preparing the Path for Quantitative Easing: The Ineffectiveness of "Conventional" Monetary Policy
  • USA
  • Japan
  • The Way Out: Quantitative Easing and Other “Unconventional” Measures
    • Shaping Expectations
    • Changing the Composition of the Balance Sheet
    • Increasing the Size of the Balance Sheet: Quantitative Easing
• Quantitative Easing in Practice: Commonalities and Differences of Two "Unconventional" Monetary Policy Approaches
  • Introduction of QE
    • Japan
    • USA
  • Active QE
    • Japan
    • USA
  • Passive QE
    • Japan
    • USA
  • Direct Lending to Borrowers and Investors
  • Effects/Success of QE
    • Balance Sheet
      • Japan
      • USA
    • Long-Term Interest Rates (Yield Curve), Money Market Developments and Inflation…
      • Japan
      • USA

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This diploma thesis examines the differences between the quantitative easing (QE) policy implemented by the Bank of Japan (BoJ) between 2001 and 2006 and the current QE policy pursued by the American central bank (Federal Reserve, Fed). The thesis focuses on comparing the two approaches, analyzing their similarities and differences, and assessing their effectiveness in addressing economic challenges. Key themes and objectives explored include:

• Comparing and contrasting the QE strategies employed by the BoJ and the Fed, including their motivations, implementation mechanisms, and outcomes.
• Investigating the rationale behind the adoption of unconventional monetary policy measures, particularly in the context of the global financial crisis.
• Analyzing the impact of QE on economic indicators, including balance sheet developments, long-term interest rates, and inflation.
• Examining the role of QE in shaping market expectations and influencing investor behavior.
• Exploring the potential limitations and risks associated with unconventional monetary policies.

Zusammenfassung der Kapitel (Chapter Summaries)

• The introduction provides context for the study, outlining the severity of the recent economic crisis and the limitations of traditional monetary policy in addressing it. It introduces the concept of quantitative easing (QE) and highlights the different approaches taken by the BoJ and the Fed.
• Chapter 2 provides a detailed overview of traditional monetary policy instruments employed by central banks, focusing on open market operations, standing facilities, and reserve requirements. It outlines these instruments' mechanisms and their historical usage in both the USA and Japan.
• Chapter 3 examines the macroeconomic and financial conditions in the USA and Japan before the implementation of QE, highlighting the factors that contributed to the need for unconventional policy measures.
• Chapter 4 explores the reasons for the ineffectiveness of traditional monetary policy in the face of the crisis and the rationale behind adopting QE. It outlines the theoretical arguments for QE as a means to influence expectations, alter the composition of the central bank's balance sheet, and increase liquidity in the banking system.
• Chapter 5 delves into the practical implementation of QE by the BoJ and the Fed. It compares the two approaches, analyzing their similarities and differences in terms of timing, asset purchases, and policy objectives. The chapter examines both active and passive QE and discusses the potential consequences of direct lending to borrowers and investors.
• Chapter 6 analyzes the effects of QE on various economic indicators, including balance sheet developments, long-term interest rates, and inflation, comparing the outcomes in Japan and the USA.

Schlüsselwörter (Keywords)

The diploma thesis focuses on the application and effectiveness of unconventional monetary policy measures, particularly quantitative easing (QE), in the context of the global financial crisis. It explores the experiences of the Bank of Japan (BoJ) and the Federal Reserve (Fed) in implementing QE, analyzing their motivations, implementation strategies, and outcomes. Key terms include: unconventional monetary policy, quantitative easing, credit easing, open market operations, balance sheet, liquidity, interest rates, inflation, financial crisis, Japan, USA.

• College: University of Vienna
• Grade: 1
• Author: Matthias Reith (Author)
• Publication Year: 2009
• Pages: 105
• Catalog Number: V139627
• ISBN (eBook): 9783640474042
• ISBN (Book): 9783668055612
• Language: English
• Tags: Geldpolitik, Fed, Bank of Japan, Monetary Policy, Unconventional Monetary Policy, Quantitative Lockerung, Quantitative Easing