Bank of Japan Essay Example for Free

wedge of japan EssayJapan underwent a decade-long odyssey with deflation and the zero-bound problem. sparing activity in Japan slowed precipitously following the collapse of the socalled bubble economy in declination 1989, and Japan began to experience deflation by early 1995. During this initial period, while the economy was slowing, forecasters and policymakers consistently underestimated the extent of Japans economic malaise. Consequently, while monetary policy seemed appropriate in terms of the prevailing outlook, the defecation proved woefully inadequate in hindsight.Convinced that Japans economic fundamentals were all overly severely distressed to be rectified with standard monetary policy measures, on skirt 19, 2001 the Bank of Japan announced a new policy of quantitative easing, in an attempt to piddle the nations stagnant economy. Under this policy, the BOJ increased its current distinguish target far beyond the level of commercial bank required reserves. This had the expected impact of reducing the already-low overnight call say effectively to zero. In addition, the BOJ committed to swan the policy until the core consumer expense index registered stably a zero percent or an increase year on year. Such a policy was rare in the history of profound banking in any country.Available Choices and Key DecisionOn March 2006, which is five years after the quantitative easing policy embarked, the issue concern it was bring abide to the desk. The Japanese economy was improving at that time and the core consumer price index (CPI) was showing even growth after years of deflation, one of the predetermined conditions for lifting the policy. As such there was widespread supposition over the future of the policy. One question arisen Would the current quantitative easing policy persist or would the BOJ return to a normal monetary stance that targeted interest rates? On March 9th 2006, the central bank made the widely expected decision to lift the qu antitative easing policy.The BOJ also draw up a set of measures aimed at averting possible market turmoil that could result from lifting the policy. The fit from QF was announced as follows The outstanding balance of current accounts at the Bank of Japan will be reduced towards a level in line with required reserves. the reduction in current account balance is expected to be carried out over a period of a few months, pickings full account of conditions in the short-term currency market. The process will be managed through and through shot-term silver market operations. With respect to the outright purchases of long-term interest-bearing Japanese government bonds, purchases will continue at the current amounts and frequency for some time.Thus, the BOJ make it clear that the reduction of the excess reserves would be conducted through adjustments of its liquidity operations and not by a rapid reduction of its portfolio of Japanese government securities. In fact, the BOJ announce d that it actually would maintain its outright purchases of long-term Japanese government bonds at the pace of 1.2 million yen per month. On the same day the BOJ made its decision, the Japan Investment Council, a ministerial-level panel chaired by Prime Minister Junichiro Koizumi, agreed to set a target of doubling the amount of direct investment in Japan by oversea investors to 5% of gross domestic product over the beside four years.Personal Decision and ReasonSince the BOJ has supplied extremely ample liquidity with current account balance at the bank as the main operating target and the core consumer price index registered stably a zero percent or an increase year on year as the shipment has already been maintained, the impart from QE is preferred choice that BOJ should make. At that time, exports have continued to increase reflecting the expansion of overseas economies. With respect to domestic private demand, business-fixed investment has also continued to increase against the backdrop of high embodied profits. Meanwhile, the output gap is gradually narrowing. Unit labour costs generally face weakening downwardly pressures as wages began to rise amid productivity gains. Furthermore, firms and households are shifting up their expectations fro inflation. In this environment, year-on-year changes in the consumer price index are expected to remain positive.From all the aspects, BOJ had already fulfilled the commitment made when the quantitative easing started to carry out. Therefore, it was time for BOJ to return to a normal monetary stance that targeted interest rates. And the outline BOJ used when exit from QE was preferred. The advantage was that the exit of QE was predominantly limited to just one item on the BOJs balance sheet and that the balance sheet adjustments were conducted through operations directly with the banking sector, which facilitated the management of the exit process. Since the central bank was set to maintain zero interest rates for some time, the exit from QE would rid of the undesirable effect of inducing the flow of individual investors duns into high-risk, high-return instruments and avoid the case rise to speculative money games played out in some corners of the real estate and stock markets.Last but not least, the process of exit from QE showed a collaborative relationship between BOJ and the government. It was a good example for BOJ to maintain a good communication with the government in order to avoid negligent lapses and avoid the aberration to the economy like which happened during the late 1980s due to the governments excessive influence over monetary policy. This decision lead BOJ one step forward to banks autonomy from the state. any in all, the exit from QE in Japan had been considered a success and its experience may serve as a useful example for other central banks.