Alan ahearne

Some thoughts on Japan’s experience with unconventional monetary policy

Alan Ahearne NUI Galway Presentation at the GIC Central Banking Series, Dublin Conference 29 September 2016

A timeline of monetary policy actions in Japan

Inflation continues to undershoot 2% target

Transmission channels

Recent movements in the yen frustrating BOJ’s efforts

Transmission mechanism of QQE, in theory, but BOJ concerned about side-effects • Adaptive expectations.

• Effect of flattened yield curve on banks’ and insurance companies’ profitability.

• BOJ already owns about one-third of JGBs -eventually run out of bonds to buy?

Concerns about cumulative damage to Japanese banks

“QQE with Yield Curve Control”

• BOJ meeting 20-21 Sept 2016.

• Commitment to overshoot 2% inflation target for an unspecified time.

• Keep short-term policy rates at -0.1%.

• Peg the yield on 10-year JGBs at around zero for the foreseeable future.

Time for helicopter money?

• Significantly negative equilibrium real interest.

– Demographics, productivity.

• Boost AD to decisively shift expectations.

• Explicit monetary financing of expansionary fiscal policy.

Thank you