Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs

Welcome to 2025. My blog recorded its 20th year of existence on December 24, 2024 which I suppose is something to celebrate. But when I look out the window and try to find optimism I fail. Who knows what the year holds and global uncertainty is dominating the narratives surrounding economic developments. We have a crazy guy about to take over the US along with his band of crazy guys. Government coalitions are failing all over the place and international cooperation is giving way to nationalism. We have Israel still slaughtering tens of thousands of innocent civilians using the equipment made available by the US and other advanced nations. Apparently opposing that slaughter makes one anti-semitic. I could go on. Those observations will clearly condition my thinking in the next year. But today, I am catching up on past work. On November 29, 2024, the Bank of Japan published a research paper – （論文）「量的・質的金融緩和」導入以降の政策効果の計測 ― マクロ経済モデルQ-JEMを用いた経済・物価への政策効果の検証 (which translates to “Measuring the effects of the “Quantitative and Qualitative Monetary Easing” policy since its introduction: Examining the effects of the policy on the economy and prices using the macroeconomic model Q-JEM” – the paper is only available in Japanese). The research uses innovative statistical techniques to assess the impact of the low interest rate, large bond-buying strategy deployed by the Bank of Japan between 2013 and 2023. The Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs.

The Bank of Japan introduced its Quantitative and Qualitative Easing policy in April 2013.

You can refresh your memories about the QQE policy by reading this paper from the former governor of the Bank of Japan, Haruhiko Kuroda (October 8, 2016) – “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control”: New Monetary Policy Framework for Overcoming Low Inflation (in English).

You might also like to read my own analysis here:

1. Q&A Japan style – Part 5b (December 5, 2019).

2. Q&A Japan style – Part 5a (December 3, 2019).

Those who follow Japanese economic policy shifts will know that the Bank of Japan has been trying to push the inflation rate up for many years.

The most recent attempt started on April 4, 2013 when the Bank of Japan announced they were resuming their program of Quantitative and Qualitative Monetary Easing (QQE), which involves the Bank entering the secondary JGB market and more recently corporate debt markets and using its endless capacity to buy things that are for sale in yen, including government bonds and other financial assets.

They announced they would spend around “60-70 trillion yen” a year (see Statement Introduction of the “Quantitative and Qualitative Monetary Easing”).

On October 31, 2014, the Bank of Japan announced it was expanding the QQE program.

It would now “conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).”

Then on January 29, 2016, the Bank issued the statement – Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” – which augmented the QQE program – continuation of the annual purchases of JGB of 80 trillion yen and the application of “a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank”.

I considered that last decision in this blog post – The folly of negative interest rates on bank reserves (February 1, 2016).

Later (during the early COVID period), the Bank of Japan added support for corporations, which stopped share prices from falling.

QQE also saw the yen depreciate as central banks around the world hiked interest rates while the Bank of Japan held their policy rate constant.

Fiscal policy also remained expansionary, with the Government actually increasing its discretionary net spending to soften the cost-of-living pressures that arose from the supply-side induced inflationary pressures.

In March 2024, once the Bank was satisfied that the latest wage bargaining rounds were delivering an increased wage outcome and that this would see the underlying inflation rate rise towards their desired level, QQE was terminated.

All the mainstream pundits (including senior economists) predicted that inflation would accelerate and the bond yields would skyrocket because the government was effectively buying massive quantities of its own debt – which the mainstream claimed was ‘printing money’.

How wrong they were.

The inflation rate barely moved although there was a little spike in 2014, which followed the fiscal policy decision to hike the consumption tax rate.

That alone demonstrated the relative strength of each of the two aggregate policy instruments (monetary and fiscal).

and the explosion in yields clearly did not pan out as the moronic financial press predicted.

The yields followed exactly the course that Modern Monetary Theory (MMT) predicted – down.

The fact that the Bank of Japan was buying up government debt at its leisure clearly demonstrated that it is a monopoly supplier of bank reserves denominated in yen.

Fast track to November 2024, when the Bank of Japan researchers have now formally investigated all this using advanced statistical techniques.

The researchers used Q-JEM, which is the Quarterly Japanese Economic Model maintained by the Bank, to simulate counterfactual outcomes for key variables in the absence of the QQE policy intervention.

The write (translated):

The difference between the simulation results and the actual values ​​of the economic and price variables was then measured as the policy effect.

How does Q-JEM allow for policy interventions to impact on real variables such as GDP growth and private capital investment and consumption expenditure?

The model is conventional and thus lower interest rates reduce costs of financing investment projects and housing purchases.

Also, the lower interest rates place downward pressure on the yen (via “the widening of the domestic and foreign interest rate differential”), which helps to stimulate demand for exports and boosts corporate profits.

I won’t discuss all the technicalities of the research methods here – I actually don’t want this blog to become a cure for insomnia.

The research concluded that:

Looking at the average for the period since April-June 2013, the policy effect on the level of real GDP was +1.3 to +1.8% … and the effect on the year-on-year change in consumer prices was +0.5 to +0.7 percentage points. Looking more closely, the policy effect has cumulatively boosted the level of real GDP since the introduction of QQE, and has supported the economy even after the spread of COVID-19 infection in 2020. The rate of increase in consumer prices has been continuously boosted, and in the period since 2016, when the actual value declined due to the slowdown in emerging countries and the strong yen, the unconventional monetary policy has been effective.

This graph (Figure 7, Page 32) shows these results based on the actual and simulated values for GDP growth (top) and the inflation rate (bottom).

The thicker line is the simulated counterfactual path (that is, no QQE intervention).

The researchers also concluded that:

Given that the year-on-year change in consumer prices remained positive at less than 0.5% for much of the late 2010s, the latter result suggests that if the series of unconventional monetary easing policies had not been implemented, prices would have continued to fall for a long time during that period.

According to the modelling, the major reason that the QQE was supportive was through the impact of lower interest rates on capital investment and household consumption, particularly the former.

Taken at face value, the research demonstrates that the major predictions that mainstream economists made about the impacts of QQE were misplaced.

However, the research needs to be qualified because it ignores the impacts of fiscal policy.

The researchers acknowledge that they take fiscal policy as given and do not seek to isolate its own impacts on total demand.

They acknowledge that this ignores the interaction between QQE and fiscal policy, even though the QQE policy essentially meant that the Government could spend without having to divert any of that expenditure into interest payments.

In the case of 10-year bonds, the yield curve control aspects of QQE even delivered negative yields, which meant that the government was being paid by bond investors to sell them the financial assets.

And that lack of diversion meant that government spending could be more targetted.

Don’t take from this that the interest payments are an issue.

However, there are distributional impacts and during this period the corporations were sitting on massive retained earnings and the private banks, that historically have been the largest purchaser of Japanese government bonds (before the central bank took over) were not hoarding profits.

Conclusion

Anyway, all the best for 2025 as my blog enters its 21st year of operation.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.