Quantitative easing proved effective in Japan: IMF paper

Japan's quantitative easing measures had a significant impact on bond yields and equity prices, but no notable effect on exchange rate and inflation expectations, according to an International Monetary Fund paper published on Wednesday.

Raphael Lam, the paper's author, uses an event study approach to assess the impact of Japan's monetary easing measures on financial markets. With policy rates near the zero bound, the Bank of Japan (BoJ) has introduced a series of unconventional monetary easing measures since late 2009 in response to lingering deflation and a weakening economy. Lam says these measures differ from typical quantitative easing in other central banks, as they include purchases of risky assets.

The results show the BoJ's monetary easing measures lowered bond yields and improved equity prices, but had no notable impact on inflation expectations. Lam says the impact on yields predominantly stems from the announcement effect rather than from the actual operations or purchases. However, he notes that the positive impact from asset purchases would need to be weighed against potential risks of undermining the independence of BoJ and crowding out of private transactions in the financial markets.

Click here to read the paper.