Quantitative and Qualitative Monetary Easing: Assessment of Its Effects in the Two Years since Its Introduction

Two years have passed since the Bank of Japan introduced quantitative and qualitative monetary easing (QQE) in April 2013. This article considers attempts to assess the effects of QQE on Japan's economic and financial developments during this period. The start of the transmission mechanism of QQE is as follows: (1) inflation expectations will be raised through a strong and clear commitment to the price stability target of 2 percent and large-scale monetary expansion to underpin the commitment; and concurrently, (2) downward pressure will be put on the entire yield curve through the Bank's massive purchases of Japanese government bonds (JGBs); thereby (3) decreasing real interest rates. On that basis, the assessment of QQE's effects was made in the following two stages: in the first stage, the degree of the decline in real interest rates was gauged; and in the second stage, the extent to which the decline in real interest rates affected economic activity and prices was assessed. The results of the assessment could be judged to be that (a) QQE lowered real interest rates by slightly less than 1 percentage point and (b) the actual improvement in economic activity and prices was mostly in line with the mechanism anticipated by QQE. Recently, however, the year-on-year rate of increase in the consumer price index slowed, mainly due to the effects of the decline in crude oil prices. Looking ahead, due attention needs to be paid to how the decline in the actual inflation rate will affect inflation expectation formation.