QUANTITATIVE EASING IN JAPAN: WILL THE RESULTS BE THE SAME? – Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

November 24, 2014 | Posted by bobbysrinivasan << back to blog

This is an ongoing conversation between Joe and Swami about the quantitative easing.
Joe: What is happening in Japan? Prime Minister Abe has called for a quick election in December 2014. Is their economy in trouble?
Swami: Yes. Currently, the Japanese economy is in deep trouble. At the end of 2012, Shinzo Abe was returned to power in Japan on a promise to revive his country’s ailing economy after a long period of stagnation. But the latest data shows that the economy has contracted a further 2.2% on an annualized basis in the third quarter. This has pushed the Japanese economy into recession (two quarters of negative economic growth)
Joe: Are they going to use quantitative easing (QE) like in the US to revive the economy?
Swami: Yes. Japan is actually a forerunner to the US in the usage of QE even though they didn’t name it that way. March 2001 was the first time Japan did and it ran till March 2006. It scaled down its balance sheet by reversing some of the QE that they did and increased the interest rate in 2006. The objective then was to lift the Japanese economy out of deflation. Prime Minister Abe wanted to add liquidity into the economy until the inflation rate raised to 2%. By October 2010, Japan was back to QE again. Currently, 4 years into it, the goal this time is again to achieve an inflation rate of 2%.
Joe: Tell me what is happening in Japan?
Swami: This is a long story. Be patient and listen. Mr. Abe’s plan was always ambitious and rested on a series of shocks he proposed to administer to the moribund economy. This involved a start with fiscal expansion which he launched in the first few weeks of taking over as the Prime Minister. This was followed by the monetary stimulus which was aimed at dragging Japan out of its inflationary spiral – the dose that was upped by their Fed governor Haruhiko Kuroda who announced that the Central bank will purchase more government bonds. He announced that the purchase will increase from 60-70 trillion Yen to 80 trillion Yen.
Joe: Does the size matter and at what point will their governor of Central bank call it quits?
Swami: Not easy to answer. The Central Bank balance sheet reflects the amount of QE undertaken. In the US, it stands at 26% while in Japan, it is currently at 62%.
Joe: Are you hopeful that with this QE, Japan will be out of Woods?
Swami: Not really. Japan has to succeed at some point. If not, it appears that there is no plan B among the Central bankers. There is a more serious issue to address. This involves income and wealth inequality among citizens and their impact on people’s prosperity. That’s for another day. Bye!!

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