Quantitative easing
March 2006, the QE was terminated as soon as the year-on-year changes in the core CPI turned positive to 0.3%. According to a survey of empirical analyses by Hiroshi Ugai (2006), some of the policies were considered as insignificant, the increased purchase of long-term JGBs, for instance. However, throughout the QE GDP picked up by 2.3%. Financial markets in Japan were also stabilized and stimulated, and the Nikkei Average Index rose by 20.3% over the span of five years. The rising trend of unemployment rate was curbed and stayed around 4%.
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Fig. 1 Japan quarterly GDP and Nikkei Average Index Source: Cabinet Office, Nikkei Indexes
QE did not reappear until the recent financial crisis, after central banks – BOE, for example – slashed their base rates dramatically. The situation was very similar to Japan seven years ago, as the cause of crisis was the burst of housing price bubbles. The damage was enlarged by complex financial derivatives, and then a global liquidity trap and economic slowdown was triggered. The Fed initiated a new round of QE in late 2008. 104 In its first round of QE, US$500 million mortgage-backed securities and US$100 million direct obligation of several government-sponsored enterprises, which faced the direct shock, were planned to be bought. Apparently, the introduction of this policy was welcomed by the financial markets, the S&P 500, one of the major US stock indexes, was pushed up by more than 11% during the week when the announcement was made. The mortgage rate dropped significantly, and this also showed the increase in confidence of the credit markets. However, the upturn stopped soon, the unemployment rate rose continuously to more than 8% and the GDP fell nearly back to the 2005 level. The outlook for the global and American economy worsened and then credit conditions became tighter. At this stage, the Fed thought the size of QE was not large enough, so the scale of purchase was then pumped up to US$1.25 trillion in March 2009.
104 Although Ben Bernanke, the Chairman of the Federal Reserve distinguished the monetary easing policy in the US, which he referred as ‘Credit Easing’, from quantitative easing; they still have the same effect: expanding the monetary base for stimulating the economy. Therefore, the credit easing will be analysed as quantitative easing in the following content.
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