History and Effects of Quantitative Easing 1


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Merry Christmas to you.

Increasing the money supply, Quantitative Easing, QE

In 2010, you repeatedly heard the above words mentioned on economic websites and articles. Today i would like to discuss more on this.

One of the tools of a monetary policy to contain negative inflation and prevent low GDP is the expansion and increase of money supply. To increase the money supply, usually the central bank “prints” money so as to encourage open market operations such as buying and selling securities. It is the objective that this money growth leads to expansion in the economy. This is known as increasing the money supply or in other words, Quantitative Easing.

The start of such monetary policy of expansion of money supply in most academic discussions refer to the operations by Bank of Japan to combat negative inflation and widespread recession in the late 1999 and early 2000. During the recent recession / global economic and financial crisis of 2008, policies to increase the money supply were employed by the US Federal Reserve. The US Federal Reserve chief Mr Ben Bernanke and monetary policymakers in the United States attempted to create liquidity in the economy and to prevent the recession from spreading by engaging in quantitative easing and by reducing the interest rates to near zero.

It seems that when central banks are faced with recession and the lack of liquidity in the economy, monetary policies to keep the currency easily available and to increase the money supply are often pursued simultaneously. Usually open market operations and bonds trading are done. When commercial banks are faced with an overwhelming amount of money and excess liquidity, loans are made out to firms and investments are encouraged.

Having said so, Japanese banks experienced in money supply expansion operations seem to face challenges curbing the negative inflation and economic downturn. Little success and prosperity was achieved and Japan faces little economic growth.

Have a great holiday and advance Happy New Year.


Masoud is a businessman and a Senior Forex Koala. Connect with him at our page on Facebook.

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  • Kangiwa

    On the 19th of September 2012 the Bank of Japan (BoJ) announced to increase its asset purchase program by ¥10tn to ¥80tn which was slightly above the market expectations, its impact on the JPY got faded within few hours.

    It actually seemed that investors initially received the wrong message behind the BoJ move. “The fact that the BoJ eased without further effective exchange-rate appreciation since the previous meeting implicitly suggests that the central bank views the yen as excessively high at the current level and will counter further appreciation with additional easing,” says Bank of America Merrill Lynch.

    That, according to BofA, reduces the tail-risk of excessive yen appreciation but it is likely to be more difficult for the BoJ to induce a significant depreciation in the short-term for the following reasons:

    1) Size of balance sheet: The size of the BoJ’s balance sheet as a percentage of GDP (31.6%) is commensurate to the ECB’s (32.5%) and larger than the Fed’s (18.4%) – In their latest decisions, the Fed decided to add US$40bn (0.3% of GDP) per month, while the BoJ an additional ¥10tn over six months (just over 0.3% of GDP). The magnitude of the ECB’s OMT will only be known when countries request intervention.

    2) Conditionality of purchases: The crucial difference, however, is that while the BoJ has a price stability goal, its asset purchases are fixed in amount and length. In contrast, the Fed’s purchases will continue until its growth mandate is achieved, while the ECB’s OMT will be unlimited in size (albeit sterilized).

    3) Duration: Japan’s latest increase in asset purchases is divided between Tbills and short-dated (1-3y) JGBs. The Fed’s MBS purchases are likely to be concentrated on the long-end, while the ECB’s expected interventions will be in short-dated, but riskier, peripheral bonds.

    4) Credibility: The market response tells us everything – while the Fed and ECB measures triggered substantial although varying moves in their respective markets (weaker dollar, narrower peripheral spreads, stronger euro), the BoJ announcement had relatively little impact.