Quantitative Easing in Japan: A critical evaluation

Abstract

The Quantitative Easing (QE) program begun by the Bank of Japan (BoJ) in 2013 is unprecedented in scope and scale. However, empirical assessment of the program’s success has been largely negative or ambivalent. Orthodox critiques of Japanese QE tend to focus on specific aspects of the transmission mechanism and identify where breakdowns may be occurring, whilst heterodox critiques focus on the structural challenges that impede monetary easing in the context of a ‘balance sheet recession’. These critiques can help identify the challenges that QE has faced in implementation, but they are less useful in helping to understand why QE has continued for so long in Japan despite poor empirical evidence for its efficacy. This paper draws on the critical macro finance (CMF) literature to argue that whilst BoJ QE was originally envisioned as a short-term intervention aimed at raising inflationary expectations and weakening the value of the yen, it has over time become embedded in the infrastructure of Japanese financial markets. QE has in effect become a de-facto bonds-for-liquidity standing facility that maintains floor prices under certain asset categories. This in turn has put the BoJ into an unintended role of market-maker of last resort, a position from which it has become difficult to wind the program back, despite the pressure to normalize its policies due to the growing distance between BoJ and Federal Reserve rates. In a broader context this serves a salient case study for the complex evolution of non-conventional monetary policies in the context of the transition from a bank-based financial system to a market-based financial system.