Lunchtime Must-Read: Hiroshi Nakaso: The Potential Impact of Large-Scale Monetary Accommodation
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The Potential Impact of Large-Scale Monetary Accommodation:
“The Bank of Japan introduced the QQE…
…to achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about two years… to dispel a view that… prices would not rise… to raise inflation expectations through a strong and clear commitment to achieve the price stability target of 2 percent, and at the same time to exert downward pressure across the entire yield curve through massive purchases of government bonds.
As a result, real interest rates will decline, thereby stimulating such private demand components as business fixed investment, private consumption, and housing investment. The upward pressure on prices will grow stronger as demand increases and the output gap narrows accordingly. Rises in actual inflation rates will be translated into higher expected rates of inflation and thus lower real interest rates. This will reinforce the virtuous cycle as the economy is provided with additional stimulus. Since its inception, the QQE has been producing the intended effects….
In recent months, however… the decline in demand following the consumption tax hike has been somewhat protracted… crude oil prices have declined substantially… slowing the CPI inflation rates… down to 1.0 percent in September…. The temporary weakness in demand associated with the consumption tax hike has already started to wane. Meanwhile, the decline in crude oil prices will have positive effects on economic activity and push up prices over the longer-run. Nevertheless… we decided to take preemptive actions to expand the QQE at the Monetary Policy Meeting held on October 31….
I would like to address a frequently cited remark that unconventional monetary stimulus could destabilize financial markets and the economy at large by encouraging ‘search for yield’ activities…. A rise in asset prices and a decline in volatility are intended effects of the QQE…. [But] we should be mindful of the risk that ‘search for yield’ activities enter into a self-fulfilling cycle…. If a rise in asset prices creates overly bullish expectations among non-financial entities such as the corporate and household sectors, it could trigger excessive risk-taking behavior in these sectors as well. Thus far, we have not observed signs of self-fulfilling, overheated price movements…