Quantitative and Qualitative Easing (QQE)
In April 2013 the new Bank of Japan Governor Governor Haruhiko Kuroda unveiled a step-up in size and commitment to monetary stimulus, in form of the Quantitative and Qualitative Monetary Easing (QQE, view post here). The new policy relied on two pillars.
- There first was a public commitment to reach the 2% price stability target within roughly two years and maintain it.
- The second pillar was the pursuit of a new operating target: the massive expansion of the monetary base through purchases of government securities, including bonds with long maturities.
Specifically, the monetary base was initially targeted to increase at an annual pace of about 60–70 trillion yen [10-12% of GDP] to reach a total of 60% of GDP, far above levels in other advanced economies. In October 2014 the pace was elevated to 80 trillion yen. At the same time the Bank decided to raise the annual pace of JGB purchases from about 50 trillion yen to 80 trillion and to extend the average remaining maturity from about 7 years to a flexible range of 7-10 years. With the introduction of yield curve control (see below) that pace was scaled back to 40-50 trillion yen.
As a consequence of these operations the Bank of Japan’s holdings of Japan Government Bonds (JGBs) have soared from a market share of 12% at the end of 2012 to an estimated 41% at the end of 2016. The average remaining maturity of the Bank of Japan’s JGB purchases has been extended as well. The Bank of Japan is also purchasing equity exchange traded funds (ETFs) and Japan real estate investment trusts (J-REITs).
Quantitative and Qualitative Monetary easing is being implemented with forward guidance. The Bank informs the public of its intention to expand the monetary base, and by implication JGB purchases, in the future and, moreover, stands ready to adjust the pace of expansion is that appears necessary for securing the 2% inflation target. Thereby, the Bank of Japan means to secure low or negative real interest rates and set in motion a self-reinforcing dynamics of rising inflation expectations, an improving output gap, and broad actual increases in prices and wages (view post here).