The End of Quantitative Easing and the Market Implication European Central Bank Kazuki Fukunaga General Manager & Treasurer European Global Markets Division 31 st May 26
What was Quantitative Easing? Policy of targeting a quantity of reserves in excess of that required for day to day money operations Excess total largely symbolic Liquidity itself does not increase by quantity of excess reserves 2
Aims of Quantitative Easing Reinforce zero interest rate policy Anchor long-term yields Create financial market stability Improve investor confidence Help eradicate deflation expectations 3
Structural changes to money market since QE introduced Banking sector consolidation Changes in banks balance sheets Introduction of RTGS Termination of deposit guarantee 4
Preparation For Ending Quantitative Easing Activate interbank money market Reactivate credit lines Reassess counterparty risk Assess need for intraday liquidity 5
A new framework for the conduct of monetary policy Clarify price stability Examining economic activity and prices - 1-2 year outlook - Longer-term outlook Outlining the current view on monetary policy - The Outlook for Economic Activity and Prices 6
35, BOJ Commercial Bank Balances vs Overnight Call Money Rate.1 3,.9.8 25,.7.6 2,.5 15,.4.3 1,.2.1 5, Mar Apr May Jun Jul Current account balances, JPY 1mn (Left) Overnight call money rate (Right) Introduced March 21 Maintained at target range of JPY 3-35 trillion from January 24 to March 26 Recent current account balance total of JPY 12.1 trillion lowest level since range of JPY 1-15 trillion in place in October 22 Reserve requirement estimated to be between JPY 6-8 trillion 7
1.5 Real Overnight Call Money Rate 3 Real ECB Refinancing Rate 1 2.5.5 2 1.5 1 -.5.5-1 -1.5 -.5-2 '98 '99 ' '1 '2 '3 '4 '5 Real overnight call money rate (deflated by core annual CPI rate) -1 '99 ' '1 '2 '3 '4 '5 Real Refinancing Rate (deflated by annual CPI rate) 5 Real Federal Funds Rate Governor Fukui - period of zero interest rates after end of QE Real short-term rates falling as inflation increases Period undefined but expected to be short 4 3 2 1-1 -2 '98 '99 ' '1 '2 '3 '4 '5 Real Federal Funds Rate (deflated by annual core CPI rate) 8
Reasons for monetary caution by BOJ Changes to money market structure GDP deflator, corporate services prices Potential slower global growth Global imbalance risk Crude oil price risk Internal political pressure Fiscal consolidation 9
.8.7.6 Japanese Interest Rates 2 1.8 1.6.5 1.4.4 1.2.3 1.2.1 21 22 23 24 25 3m interbank rate (Left) 1y JGB yield (Right).8.6.4 1-yr yield spike causing MOF opposition to build Complicates fiscal consolidation 1
1,1, Outstanding Finance Bills vs Intervention Operations 16, 1,, 9, 8, 7, 14, 12, 1, 6, 8, 5, 4, 3, 2, 6, 4, 2, 1, '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 Total outstanding amount of Finance Bills JPY 1 mn (Left) Currency market interventions total, JPY bn - Japan (Right) 11
4 BOJ Current Account Balance vs Finance Bill Rate.25 35 3.2 25.15 2.1 15 1.5 5 '2 '3 '4 '5 BOJ current account balance, JPY trn (Left) Finance bill rate (Right) 12
.35 3-Month Tibor Fixing Rate vs 3-Month Libor Fixing Rate.3.25.2.15.1.5 Jan Feb Mar Apr May Interbank rates BBA LIBOR 3 month, %, fixing - Japan Interbank rates TIBOR 3 month, %, fixing daily - Japan 13
5 Real GDP vs Tankan Correlation:.8 3 4 2 3 1 2 1-1 -2-3 -1-4 -2-5 -3 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 Annual Real GDP (Left) Recession Periods - Japan Large Manufacturers' Diffusion Index - Tankan (Right) Outlook for economic activity -6 Annual Real GDP 2.4 % in 26 2. % in 27 14
5, Non-Performing Loans vs Nikkei Bank Index 3, 45, 4, 2,5 35, 3, 2, 25, 2, 1,5 15, 1, 1, 5, '98 '99 ' '1 '2 '3 '4 '5 '6 Loans and discounts NPL total, all banks total, JPY 1mn - Japan (Left) Nikkei 5 banking index, close, JPY - Japan (Right) 5 NPL portfolio substantially reduced Confidence in banking sector restored 15
24, National Debt Service Expenditure 22, 2, 18, 16, 14, 12, '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 General account, expenditure, national debt service, JPY 1 mn - Japan Total debt JPY 774 trillion; 151% of GDP Government targeting primary balance by 211 Increased tax burden - Sales tax - Income tax - Inheritance tax 16
1 Japanese Consumer Prices (Annual).5 -.5-1 -1.5-2 2 21 22 23 24 25 CPI nationwide % CPI nationwide, excluding fresh food, % Outlook for inflation Core annual inflation.6% in 26.8% in 27 17