Evolution of Unconventional Monetary Policy: Japan s Experiences CIGS Conference on Macroeconomic Theory and Policy May 29, 2017 Institute for Monetary and Economic Studies Bank of Japan Shigenori SHIRATSUKA The views expressed herein are those of the presenter and do not necessarily reflect those of the Bank of Japan.
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 1
Nominal Interest Rates 9 8 7 6 5 4 3 2 1 0-1 ( % ) O/N call rate JGB 10-year Sources: Bloomberg; Bank of Japan. 2
Japan s Deflation Mild but Prolonged Deflation: Downward shift in inflation expectations Coexistence w/ low growth: Triggered by Burst of AP Bubble: Interaction b/w demand & supply-side factors Not just an amplifying factor of a business cycle But more structural and persistent impacts: Downward shift in growth trend 3
Japan s Deflation (2) Japanese Economic System: Based on long-term (implicit) contracts: main bank system, life-time commitment to a company w/ seniority wage scheme,. Intertemporal smoothing of risk: A buffer role against short-term shocks A buffer role: Fragile against substantial structural changes 4
BOJ s B/S Size 100 (Ratio to nominal GDP, %) 80 60 40 20 Average of 1955-94 9.7% Banknotes Total 0 1955 60 65 70 75 80 85 90 95 2000 05 10 15 Sources: Cabinet Office, National Accounts; Bank of Japan. 5
Policy Regimes Financial Crisis Management: 1997-98 Zero Interest Rate Policy (ZIRP): 1999-2000 Quantitative Monetary Easing (QE): 2001-06 Comprehensive Monetary Easing (CE): 2010-13 Quantitative & Qualitative Monetary Easing (QQE): 2013-? w/ Negative Interest Rate: Jan 2016- w/ Yield Curve Control: Sep 2016- Evolving Nature of Policy Frameworks 6
CB B/S Size 550 (end-july 2007=100) 100 (Ratio to nominal GDP, %) 500 450 400 Fed ECB BOJ 80 Fed ECB BOJ 350 60 300 250 40 200 150 20 100 50 0 2007 10 15 17 2007 10 15 17 Sources: Board of Governors of the Federal Reserve System, European Central Bank, Bank of Japan 7
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 8
Policy Interest Rates 8 6 ( % ) BOJ: Uncollateralized O/N call rate Fed: Federal funds rate ECB: EONIA 4 2 0-2 Sources: Board of Governors of the Federal Reserve System, European Central Bank, Bank of Japan 9
Unconventional Policies Effective Lower Bound Today: i t B i t P t Quantitative Easing Tomorrow: i B i P t 1 t 1 t Forward Guidance Negative Interest Rates 1 Close linkage 10
CB B/S under Unconventional Policy (Observed unconventional monetary policy) Broadly defined QE Unconventional assets Reserves Conventional assets Reserves Currency in circulation Conventional assets Currency in circulation Narrowly defined QE (Size) (Composition) Narrowly defined CE Conventional assets Reserves Reserves Conventional Reserves Unconventional assets Conventional assets Reserves assets Currency in circulation Currency in circulation Currency in circulation Conventional assets Currency in circulation Source: Shigenori Shiratsuka (2010), Size and Composition of the Central Bank Balance Sheet: Revisiting Japan s Experience of the Quantitative Easing Policy, Monetary and Economic Studies, 28, pp. 79-105. 11
Some Issues for Discussions Policy Effectiveness: F-system rescue operation vs. macroeconomic stabilization policy Combinations of Unconventional Tools, given economic, social, and political environments Policy Rule?: Predictability vs. surprises Evolving nature: Border w/ Fiscal Policy: Intervention to resource allocations 12
Conventional vs. Unconventional Conventional Unconventional Policy tools O/N rate control FG, LSAPs, NIRs Determinants of CB B/S size Interbank transactions Intervention to resource allocations Policy management Debt side (demand for CB money) No excess reserves Scarce reserves Remain neutral Gradualism High predictability Asset side (quantity & variety of unconventional asset purchases) Massive excess reserves Pre crisis Limited: market distortions, impaired MP transmission channels Gradualism (learning by doing) Arbitrage After crisis Intentional & massive interventions Surprise? 13
Fed s Balance Sheet 5 4 3 2 1 0-1 -2-3 -4-5 (tril. US dollars) Assets CB liquidity swap Short-term lending Liabilities and Credit facilities 2007 08 09 LLR lending Treasury SFA Other assets Other liabilities Source: Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances. GSE securities Treasury securities Currency in circulation Reserves 10 11 12 13 14 15 16 17 14
BOJ s Balance Sheet 500 400 300 200 100 0-100 -200-300 -400-500 (tril. yen) Assets Others LLR lending, Credit facilities & equities Bills sold Currency in circulation Liabilities and net assets Short-term fund-supplying operations TBs Other liabilities & net assets ETFs, RIETs, & etc. JGBs Reserves Source: Bank of Japan, Monetary Base and the Bank of Japan's Transactions. 15
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 16
Japan Premium Source: Joe Peek, and Eric S. Rosengren, (2001), Determinants of the Japan Premium: Actions Speak Louder, Journal of International Economics 53, pp. 283 305. 17
Japan Premium (cont d) Source: Makoto Saito and Shigenori Shiratsuka (2001), Financial Crises as the Failure of Arbitrage: Implications for Monetary Policy, Monetary and Economic Studies 19(s-1), pp. 239 270. 18
Dual Operation Simultaneous Operations: Provision of money in relatively long maturities Absorption of money in short maturities Impaired MP Transmission Mechanism: Liquidity constraints Failure of arbitrage Malfunction in transmission b/w O/N & longer maturities Not just adjusting aggregate amounts of liquidity, but allocation of liquidity 19
BOJ B/S: Jul 96-Mar 99 120 100 80 60 40 20 0-20 -40-60 -80-100 -120 (tril. yen) Assets Short-term fund-supplying operations Liabilities and net assets Other liabilities & net assets TBs LLR lending Currency in circulation Bills sold JGBs Others Reserves Source: Bank of Japan, Monetary Base and the Bank of Japan's Transactions. 20
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 21
Conditional Commitments ZIRP (from Feb 1999 to Aug 2000): Commit to zero rate until deflationary concerns are dispelled QE (from Mar 2001 to Mar 2006): Commit to CAB targeting until CPI inflation becomes stably zero or above Preciseness of Conditionality 22
Directive on Feb 12, 1999 The Bank of Japan will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible. To avoid excessive volatility in the short-term financial markets, the Bank of Japan will, by paying due consideration to maintaining market function, initially aim to guide the above call rate to move around 0.15%, and subsequently induce further decline in view of the market developments. 23
O/N Call Rate 0.30 ( % ) 0.25 0.20 Declaration of Policy Commitment 0.15 0.10 Introdcution of ZIRP 0.05 0.00 Jan Feb Mar Apr May Jun 1999 Note: Dashed lines indicate the days MPM was held. Source: Bank of Japan 24
Excess Reserves 10 (tril yen) 8 Excess reserve Required reserve ZIRP Y2K 6 4 2 0 1998 1999 2000 Source: Bank of Japan 25
BOJ B/S: Jan 99-Dec 06 200 150 100 (tril. yen) Assets LLR lending Others Short-term fund-supplying operations TBs 50 0-50 JGBs Currency in circulation -100-150 -200 Liabilities and net assets Bills sold Reserves Other liabilities & net assets Source: Bank of Japan, Monetary Base and the Bank of Japan's Transactions. 26
Maturity of Short-term Operations 160 (days) 140 120 100 80 60 40 20 0 1999 2000 01 02 03 04 05 06 Source: Bank of Japan 27
Strong Liquidity Effects 3.0 2.5 ( % ) Jul-99 ZIRP Jan-99 3.0 2.5 ( % ) QE 2.0 1.5 2.0 1.5 Jan-01 1.0 1.0 0.5 0.5 Apr-01 0.0 0 2 4 6 8 10 12 14 (year-to-settlement) 0.0 0 2 4 6 8 10 12 14 (year-to-settlement) Source: Kunio Okina and Shigenori Shiratsuka (2004) Policy Commitment and Expectation Formation: Japan s Experience under Zero Interest Rates, North American Journal of Economics and Finance 15: 75-100. 28
Limited Stimulating Effects 3.0 ( % ) 2.5 2.0 1.5 LFR 1.0 0.5 0.0 PD 0 2 4 6 8 10 12 14 (year-to-settlement) Source: Kunio Okina and Shigenori Shiratsuka (2004) Policy Commitment and Expectation Formation: Japan s Experience under Zero Interest Rates, North American Journal of Economics and Finance 15: 75-100. 29
(Long-term forward rates, %) Confined Deflationary Expectations 3.0 2.5 2.0 1.5 Sample period: Mar 1998 Jun 2006 1.0 0.5 1.0 1.5 2.0 2.5 3.0 (Policy durations, years) Source: Kunio Okina and Shigenori Shiratsuka (2004) Policy Commitment and Expectation Formation: Japan s Experience under Zero Interest Rates, North American Journal of Economics and Finance 15: 75-100. 30
FG and Steady-state Level (Constant Steady-state) (Downward Shift in Steady-state) Policy rate Borrowing future easing effects in advance Downward shift in a steady-state level ZLB History dependence: Keeping zero rates for a longer period than that without considering ZLB. Longer commitment to zero rates Policy rate w/o ZLB 31
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 32
Comprehensive Monetary Easing Asset Purchase Program: Introduced in Sep 2010 Expansion of size and variety of assets purchased (JGBs, TBs, CPs, ABCPs, CBs, ETFs, J-RIETs) Fixed-rate funds-supplying operations (initially introduced in Dec 2009) Significant Changes in Composition, Not Size: Variety of assets purchased JGB: Conventional asset Unconventional asset 33
Banknote Rule for JGB Holdings Outright Purchases of JGBs: A ceiling at the outstanding amount of bank note issuance Implications: Consistent with smooth provision of long-term stable funds to accommodate banknote demand Securing the credibility of the monetary policy No intention of providing price support for JGBs No intention of money-financing of government deficit 34
BOJ B/S: Jan 09 Dec 12 200 150 (tril. yen) Assets Credit facilities Others Short-term fund-supplying operations TBs ETFs, RIETs 100 50 0 JGBs -50 Currency in circulation -100-150 -200 Liabilities and net assets Other liabilities & net assets Reserves Source: Bank of Japan, Monetary Base and the Bank of Japan's Transactions. 35
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 36
Developments in QQE Introduction of QQE (Apr 2013) Expansion of QQE (Oct 2014) Introduction of QQE w/ a Negative Interest Rate (Jan 2016) Introduction of QQE w/ Yield Curve Control (Sep 2016) 37
Monetary Base and JGB Holdings 500 400 (tril. yen, end of period) Monetary base JGB holdings Expansion of QQE (Oct. 2014) +80 tril. yen /year 300 200 100 0 Introduction of QQE w/ NIR (Jan. 2016) Introduction of QQE w/ YCC (Sep. 2016) Introduction of QQE (Apr. 2013) +60-70 tril. yen/year +50 tril. yen /year +80 tril. yen /year Source: Bank of Japan 38
BOJ s B/S: Jan 2013-500 400 300 200 100 0-100 -200-300 -400-500 (tril. yen) Assets Short-term fundsupplying operations Liabilities and net assets TBs Other liabilities & net assets ETFs, RIETs Others JGBs Currency in circulation Reserves Source: Bank of Japan, Monetary Base and the Bank of Japan's Transactions. 39
Yield Curve Control 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4 ( % ) Jul 27, 2016 (bottom) Sep 20, 2016 (One day before introduction of QQE w/ YCC) Sep 28, 2016 (Bottom under QQE w/ YCC) Feb 2, 2017 (Peak under QQE w/ YCC) May 15, 2017 (Latest) Policy rate 0.1% 10-year JGB yeild Around 0% -0.6 0 1 2 3 4 5 6 7 8 9 10 15 20 30 40 (maturity) Source: Bloomberg. 40
Inflation-Overshooting Commitment CPI inflation P-stability target 2% time 41
Escaping from Deflation Rate of inflation Phillips curve Inflation target (2%) Re-anchoring of inflation expectations Potential GDP y p Real output (Real GDP) 42
Core CPI 3 2 1 (y/y % chg.) Less perishables Less perishables and energy Trimmed mean Median Projection for BMs FY2019 FY2018 FY2017 0-1 FY2016-2 -3 1995 2000 05 10 15 19 Source: Ministry of Internal Affairs and Communications, Consumer Price Index. 43
Long-term Inflation Expectations 4 (annual average, percent) United States (10 years ahead) 3 Japan (6 to 10 years ahead) 2 1 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: Consensus Economics Inc., Federal Reserve Bank of Philadelphia. 44
Plan of Today s Talk Introduction Overview of Unconventional Policies Japan s Episodes: Episode-1: F-Crisis Management in 1997-98 Episode-2: Forward Guidance under ZIRP & QE Episode-3: Composition Changes under CE Episode-4: QQE and Inflation Expectations Future of CB Policy Framework 45
Margins to Reduce Policy Rates Policy Rate Reductions Switzerland Euro area Canada Australia Norway Sweden USA UK 0-2 -4-6 % Policy responses in the future Large-scale asset purchase or Negative interest rates Policy effectiveness Political economy risks Tech Bubble Global Financial Crisis 46
Future of CB B/S Unconventional assets Reduce B/S size (Reduce excess reserves) Reserves Conventional assets Reserves Cash Conventional assets Cash Maintain large B/S (Large excess reserves by paying interests on reserves) Composition of conventional & unconventional assets? Reserves Cash 47
Summary Overview of Unconventional Policies: Effectiveness of forward guidance Size & composition of CB B/S Japan s Experiences of Unconventional Policies: Evolving nature & Learning-by-doing Way of thinking on policy interventions Future of CB Policy Framework 48
Extra Charts on Japan s Deflation CPI Inflation Growth Path Asset Prices Demographic Changes 49
Core CPI 25 (y/y chg., %) 20 15 10 5 0-5 FY 1971 75 80 85 90 95 2000 05 10 15 Source: Ministry of Internal Affairs and Communications, "Consumer Price Index." 50
Downward Shift in Growth Trend 13.5 (billion yen, log-transformed value) 13.0 12.5 12.0 11.5 Real GDP HP-filtered trend 11.0 Source: Cabinet Office, National Accounts. 51
General Prices & Asset Prices 140 (1989/4Q=100) 120 100 80 60 40 20 0 Land prices CPI Stock prices Nominal GDP Sources: Cabinet Office, National Accounts; Ministry of Internal Affairs and Communications, Consumer Price Index; Japan Real Estate Institute, Urban Land Price Index; The Nihon Keizai Shimbun, Nikkei 225 Stock Average. 52
Demographic Changes 1.4 1.2 1.0 0.8 0.6 0.4 Population Size by Age Groups (100million persons) 15-64 Projection Over 65 0.2 0-14 0.0 1950 2000 2050 2100 Population Growth -2.0 1950 2000 2050 2100 Sources: Ministry of Internal Affairs and Communications, Population Estimates; National Institute of Population and Social Security Research, Population Projections for Japan. 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 (y/y chg., %) Projection Working-age population Total population 53