Haruhiko Kuroda: Quantitative and qualitative monetary easing
Speech by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at a meeting held by the
Yomiuri International Economic Society, Tokyo, 12 April 2013.
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Introduction
It is a great honor to be invited to this meeting hosted by the Yomiuri International Economic
Society today. This is my first speech as Governor of the Bank of Japan. Today, I would like
to explain the "Quantitative and Qualitative Monetary Easing" that we decided to embark on
last week.
I. Basic thinking
When I was appointed as the governor, I had the following basic thinking in mind.
The first is that we should do whatever is necessary to overcome deflation, which has been
causing a deterioration in Japan's economy for nearly 15 years. The Bank of Japan has
engaged in a wide range of monetary easing efforts - including the implementation of the
zero interest rate policy, the quantitative easing policy, and comprehensive monetary easing.
Despite its cumulative efforts, there have been no easily derived concrete results, and I have
felt strongly that we should make all-out efforts to utilize every possible resource bestowed
upon the Bank, rather than to adopt an incremental approach - or, put differently, to adopt
gradualism.
The second point is the importance of committing strongly and clearly that the Bank is
responsible for achieving the price stability target. At the Monetary Policy Meeting held in
January, the Bank - on its own judgment - set the price stability target at 2 percent in terms
of the year-on-year rate of change in the consumer price index (CPI) and made a
groundbreaking commitment to achieve that target at the earliest possible time. Regarding
the time frame for achieving the target, looking at other economies, many central banks have
been making efforts to achieve the price stability in the medium term, with a time horizon of
about two years for the effects of monetary policy to permeate the economy. I have found it
appropriate for Japan's economy as well to make a commitment with a time horizon of about
two years.
The third point is to convey the Bank's strong policy stance to markets and economic entities
with clarity and intelligibility, thereby dramatically changing the expectations of market
participants as well as firms and households. During the course of 15 years of deflation, the
public's behavior has been based on the assumption that prices would either decline or be
unlikely to rise. It is necessary to eliminate deflationary expectations through the Bank's
strong commitment and intelligible explanation.
And lastly, we should enter a new phase of monetary easing both in terms of quantity and
quality in order to underpin such a commitment. There is a reason to emphasize the
qualitative aspect of monetary easing along with its quantitative aspect. While the Bank of
Japan and other central banks in advanced economies have almost exhausted further
declines in short-term interest rates, they now engage in policies to increase the size of their
balance sheets as part of unconventional policy measures. There is now a broad consensus
with regard to the effect of balance sheet expansion. That is, the central banks' purchases of
government bonds and other assets from the markets have the effect of encouraging further
declines in long-term interest rates and lowering risk premia of asset prices by absorbing
risks - such as the one stemming from interest rate fluctuations. Consequently, it becomes
important to determine not only how much liquidity to supply but also how to supply that
quantity. Even with the same amount of liquidity, purchasing short-term T-Bills produces
different effects than in the case where the Bank purchases other assets such as long-term
JGBs and risk assets like exchange-traded funds (ETFs). Thus, it is important to work on two
aspects of monetary easing, both in terms of quantity and quality.
II. Introduction of the "Quantitative and Qualitative Monetary Easing"
With this basic set of views, I assumed the governorship and attended the Monetary Policy
Meeting on April 3 and 4. Following discussion with other Policy Board members and taking
into account the staff view regarding practicalities, we came to a conclusion. The name of the
quantitative and qualitative monetary easing that we introduced this time speaks for itself.
This is indeed a new phase of monetary easing both in terms of quantity and quality.
Strong and clear commitment
First, the Bank decided - as I mentioned earlier - to convey a strong and clear commitment.
The Bank clearly announced in a statement that "[it] will achieve the price stability target of
2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at
the earliest possible time, with a time horizon of about two years." This is the decision of the
Bank's Policy Board - namely, it expresses the will of the Bank as an institution.
New phase of monetary easing both in terms of quantity and quality
Next, the Bank decided to embark on the quantitative and qualitative monetary easing as a
means to underpin this commitment.
Concretely, with a view to pursuing quantitative monetary easing, the Bank decided to
change the main operating target for money market operations from the uncollateralized
overnight call rate (i.e., interest rates) to the monetary base (i.e., quantity) and conduct
money market operations so that the monetary base will increase at an annual pace of about
60-70 trillion yen. The monetary base is the currency supplied to the economy as a whole by
the Bank; more specifically, it is the sum of banknotes and coins in circulation and financial
institutions' current account deposits at the Bank of Japan. As of end-2012, its amount
outstanding was 138 trillion yen, and it is expected to reach about 200 trillion yen at
end2013 and 270 trillion yen at end-2014. It will almost double in two years. This accounts for
nearly 60 percent of nominal GDP, far above the levels of any other advanced economies.
As a means to increase the monetary base, the Bank decided to purchase JGBs so that its
holding of their amount outstanding on the Bank's balance sheet will increase at an annual
pace of about 50 trillion yen. Consequently, the Bank's holding of JGBs will be increased
from 89 trillion yen at end-2012 to 190 trillion yen at end-2014. In short, it will more than
double in two years. The monthly flow of JGB purchases is expected to become 7+ trillion
yen, because the Bank needs to compensate for JGBs redeemed.
In terms of quality, in increasing the purchases of JGBs, those with all maturities including
40-year bonds will be made eligible for purchase, and the average remaining maturity of the
Bank's JGB purchases will be extended from slightly less than three years at present to
about seven years - equivalent to the average maturity of the amount outstanding of JGBs
issued. We intend to strengthen the working of monetary easing on the economy and prices
by encouraging a further decline not only in shorter-term interest rates but also in those
across the yield curve. Furthermore, with a view to lowering risk premia of asset prices, the
Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their
amounts outstanding on the Bank's balance sheet will increase at an annual pace of about
1 trillion yen and about 30 billion yen, respectively.
Intelligible monetary policy
In the implementation of the quantitative and qualitative monetary easing, as mentioned
earlier, we have taken account of the need to present our policy stance intelligibly to markets
as well as firms and households.
Until last week, the Bank's purchases of JGBs had been conducted according to the
following two types of operations: one under the Asset Purchase Program introduced in
October 2010 and the other for facilitating money market operations, often referred to as
Rinban operations. This reflects the Bank's various efforts to tackle challenges in response to
changes in economic circumstances. In fact, these types of operations, reflecting their
objectives, had differed in terms of the purchasing methods used. However, this framework
was somewhat complicated and entailed a problem that the Bank's serious efforts to combat
deflation by monetary easing were rather difficult for the market and the public to understand.
Based on such recognition, the Bank has terminated the Asset Purchase Program and
synthesized purchasing methods of JGBs. Moreover, it has decided to express the target of
JGB purchases as a net increase in its JGB holdings - namely, at an annual pace of about
50 trillion yen. We believe that these changes will facilitate understanding of the Bank's
intention with regard to monetary easing in a straightforward manner.
As I mentioned earlier, the Bank decided to adopt the monetary base as an indicator for
quantitative easing. This also reflects our judgment that the monetary base - the total
amount of currency that the Bank supplies to the economy as a whole - will be the most
appropriate indicator for conveying the Bank's aggressive stance on monetary easing to the
public.
Continuation of monetary easing
The Bank will continue with the quantitative and qualitative monetary easing that I have
explained thus far, "aiming to achieve the price stability target of 2 percent, as long as it is
necessary for maintaining that target in a stable manner." Obviously, there will be both
upside and downside risks to economic activity and prices going forward. The Bank will
examine those risks carefully and will not hesitate to make adjustments as appropriate,
should circumstances warrant.
One may ask, why is there a connection between what I have just mentioned and a time
horizon of about two years? In our view, the latest decisions include all the necessary
measures to achieve the 2 percent target with that time horizon. Nonetheless, it is not
appropriate to say that the monetary easing will only last for two years. The economy entails
uncertainty, and there is always a degree of latitude in people's expectations; for example,
some people may not share the view that the inflation rate will reach 2 percent in two years.
For everyone - including those who are somewhat skeptical - to be convinced that sufficient
monetary easing will be implemented, it is appropriate to state that the Bank will continue
with monetary easing, aiming to achieve the price stability target of 2 percent, "as long as it is
necessary." Making such a commitment will, in the end, further ensure the achievement of
the target in two years.
I also want to elaborate on the meaning of "as long as it is necessary." The Bank does not
believe 2 percent inflation achieved at a certain point in time is enough; rather, it believes
2 percent inflation should be maintained in a stable manner. Therefore, even if the inflation
rate hits 2 percent at some point, the Bank could continue with the quantitative and
qualitative monetary easing if it is judged necessary to do so in order to maintain that rate in
a stable manner. The opposite could also be true. In short, analyzing the fundamental
movement of prices, the Bank intends to continue with monetary easing, as long as it is
necessary.
III. Effects of the "Quantitative and Qualitative Monetary Easing"
Transmission channels of monetary easing effects
I will next explain the mechanism of achieving the 2 percent target under the quantitative and
qualitative monetary easing. The Bank expects that the effects of monetary easing will
permeate the economy and influence prices primarily through three channels.
First, the purchases of JGBs, ETFs, and J-REITs will encourage a further decline in
longerterm interest rates and lower risk premia of asset prices. This will raise firms' credit demand
through a decline in funding costs. Second, as a result of the Bank's massive purchases of
JGBs, both investors and financial institutions investing in JGBs are expected to shift from
JGBs to such risk assets as stocks and foreign-denominated bonds and/or to increase
lending within their portfolios. In economic textbooks, this is referred to as a portfolio
rebalancing effect. The extension of the average remaining maturity of JGB purchases
reflects our understanding of such an effect. Third, the commitment to achieve the price
stability target at the earliest possible time and the continuation of the new phase of
monetary easing are thought to drastically change the expectations of markets and economic
entities. This is what I referred to earlier as the elimination of deflationary expectations. A rise
in the expected inflation rate will not only influence actual prices but also stimulate private
demand through a decline in real interest rates.
Developments in economic activity and prices
Looking at recent developments in economic activity and prices, it seems that the conditions
are being prepared to demonstrate the effects of the quantitative and qualitative monetary
easing through the three transmission channels that I just mentioned. Indeed, Japan's
economy has shown some bright signs of picking up. Going forward, we expect the economy
to return to a moderate recovery path against the background of firm domestic demand and a
pick-up in growth rates of overseas economies. In recent months, conditions in financial
markets have significantly turned favorable due to the abatement of global investors' risk
aversion and expectations for domestic policies.
The year-on-year rate of change in the CPI has recently been at around 0 percent or slightly
negative, but looking to the future, it is expected to turn positive and start picking up, mainly
reflecting the improvement in the aggregate demand and supply balance. Looking at
breakeven inflation rates - using the information content in inflation-indexed bonds - and the
results of economists' and households' surveys, we have increasing evidence that inflation
expectations are starting to rise. Behind this are expectations for policies including monetary
policy. This indicates that policies can move expectations.
The Bank expects that the quantitative and qualitative monetary easing will support, in a
timely manner, the positive movements that have started to appear in economic activity and
financial markets, contribute to a further pick-up in inflation expectations that appear to have
risen, and lead Japan's economy to overcome deflation that has lasted for nearly 15 years.
IV. Some points of discussion in the monetary policy conduct
After the announcement of this time's decision, some wonder if the Bank can carry out the
quantitative and qualitative monetary easing while others say that it has gone too far. In
addition, we often receive questions about the relationship between monetary policy and
other policies conducted by the government. In the final part of my remarks, I wish to answer
some of these questions.
Execution of the quantitative and qualitative monetary easing
The newly planned purchase of JGBs at an annual pace of 50 trillion yen is massive and
goes beyond the conventional knowledge of market participants. In addition, the
achievement of the monetary base of 270 trillion yen at end-2014 requires that financial
institutions' current account balances held at the Bank reach 175 trillion yen. Again, this is
extremely large. Furthermore, the extension of the average remaining maturity from slightly
less than three years to about seven years (i.e., allowing for a range of about six to eight
years) necessitates the purchases of JGBs with longer maturity, including 20- and 30-year
bonds. Such JGBs with super-long maturities are likely to be held to maturity by institutional
investors and their market is not so active. Against this background, some market
participants wonder if the Bank is able to purchase these JGBs in practice.
To answer this question, we can do this, in principle, so long as the Bank purchases a wide
range of JGBs through a competitive auction. I assure you that we will achieve our
commitment. Having said so, however, such purchases by the Bank might not proceed
smoothly because they go beyond the market's convention. To start with, these measures
are meant to encourage a further decline in interest rates; thus, effects on the market are
inevitable to some extent. As the Bank wants to facilitate such operations, it is vital to have
the cooperation of market participants, such as counterparties' active bidding in the Bank's
market operations. The Bank has decided to set forums for enhanced dialogue with those
market participants in order to exchange views pertaining to money market operations and
market transactions in general. In fact, it has already initiated such dialogue with various
market participants since last week.
Relationship with financing the fiscal deficit
Once the Bank embarks on the large-scale purchase of JGBs under the quantitative and
qualitative monetary easing, some worry that this will result in financing the fiscal deficit. The
JGB market remains stable, but if such purchases by the Bank were regarded as monetizing
government debt, the JGB market might start destabilizing, raising long-term interest rates in
a manner inconsistent with the real economy. This might not only offset the monetary easing
effects but also have negative effects on Japan's financial system and its economy as a
whole.
Of course, the JGB purchases under the quantitative and qualitative monetary easing are
executed for the purpose of conducting monetary policy and not for the purpose of financing
fiscal deficits. Moreover, in order to avoid a possible arousal of doubt regarding the Bank's
increasing purchases of JGBs as financing fiscal deficits, it is vital for the government to
clearly show the future course of fiscal consolidation and steadily make progress to reform
the fiscal structure. On this point, the government - in the joint statement released with the
Bank in January - stated that "in strengthening coordination between the Government and
the Bank of Japan, the Government will steadily promote measures aimed at establishing a
sustainable fiscal structure with a view to ensuring the credibility of fiscal management." We
strongly expect the government to move on that front.
Because the Bank synthesized the purchasing methods of JGBs this time, it temporarily
suspended the so-called banknote principle. This principle indicates that the purchases of
JGBs conducted for facilitating money market operations are subject to the limitation that the
outstanding amount of long-term government bonds effectively held by the Bank be kept
below the outstanding balance of banknotes issued. In reality, however, after the introduction
of the Asset Purchase Program in 2010, the total amount outstanding of JGBs held by the
Bank has already exceeded the outstanding balance of banknotes. Based on this
recognition, the Bank has decided to temporarily suspend the banknote principle as it
pursues the quantitative and qualitative monetary easing. In any case, let me reiterate that
the Bank will not finance the fiscal deficit during or after the period of the quantitative and
qualitative monetary easing, and this line of thinking will not change.
Effect on exchange rate
We also hear comments about the relationship between monetary policy and exchange rates
against the background of the recent depreciation of the yen. On this point, we have no
intention to conduct monetary policy targeting the exchange rate. The objective of the Bank's
monetary policy is, obviously, to pursue the stability of domestic prices.
It is true that, when a central bank takes accommodative actions, there is a tendency for its
country's currency to depreciate. This, however, is merely a general observation, ceteris
paribus. For instance, if the growth potential of the economy rises as a result of monetary
accommodation as well as appropriate fiscal policy and the growth strategy, its currency
could appreciate rather than depreciate.
In any event, the Bank's monetary policy is focused on achieving the domestic objective to
lead Japan's economy toward overcoming deflation. Achieving this goal will eventually
provide the global economy with favorable effects. I believe that the international community
shares a common understanding on these points.
Three-pronged strategy (three arrows)
At present, the government is determined to address challenges that Japan's economy
faces, including the overcoming of deflation, through the combination of three policy arrows -
namely, bold monetary easing, flexible fiscal policy, and a growth strategy that promotes
private investment. I think it is indeed an appropriate policy package. Achieving the price
stability target of 2 percent at the earliest possible time, through the first arrow (i.e., monetary
easing) is the role of the Bank of Japan. As I have explained to you today, the Bank will
achieve this target under its own responsibility.
In addition, parallel to monetary easing, if the government creates real demand and wages
and employment improve through the expansion of consumption and investment, this is
expected to contribute to generating a virtuous cycle that eventually will lead to a gradual
pick-up in inflation. It is in this sense that the implementation of the other two arrows
- namely, flexible fiscal policy for the time being and a growth strategy - will lead to raising
the growth outlook, thereby contributing to the achievement of the price stability target more
smoothly. We have high expectations that the government will make steady progress on
these fronts.
Concluding remarks
For eight years before assuming the position of Governor of the Bank of Japan, I looked at
Japan from overseas as President of the Asian Development Bank. No other country has
suffered from deflation for nearly 15 years. Given that Japanese financial institutions, firms,
and individuals play active roles in each Asian economy, I have often found it hard to accept
the contrasting image at home and abroad.
The world is eagerly waiting for Japan to overcome deflation and for Japan's economy to
recover its economic strength. I believe steady efforts toward achieving these goals will also
lead Japan toward regaining its influence on the global society.
Thank you.