The early Japanese QE experience

Alex Woodruff


April 26th, 2015

QE is the new kid on the block of monetary policy but the verdict is out on its efficacy. As more central banks turn to QE to ease zero interest rate woes, Alex Woodruff wonders how this practice hit the mainstream.

As the European Central Bank announces a €1.1 trillion quantitative easing (QE) program, the US Federal Reserve sends signals it will halt its QE program, and Japan continues to print money, this economist wonders when did QE hit the mainstream and what was the result?

When did QE hit the mainstream?

QE is the relatively new kid on the block of monetary policy. The Bank of England defines QE as ‘an unconventional form of monetary policy where a Central Bank creates new money to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy, as the cost of borrowing decreases to zero, and return inflation to target.’(1) This ‘unconventional’ policy has existed since Governments were able to control the money supply and was popular in post WWI Germany. To understand when this policy became a feasible action for central banks and not just post war governments attempt to pay off war debt (2), we must look to Japan.

It all started in 2001 when Japan decided to print money to jolt its stagnated economy into growth. After three decades of average real GDP growth of 6% Japan’s economy fell into a recession in the 1990’s, and faced a stagnated economy upon recovery from the downturn (3).  The major tool of monetary policy, interest rates, had been exhausted and by 2001 interest rates were at zero per cent. To prevent further deflation the Bank of Japan (BoJ) announced the unorthodox policy of a QE program (QEP). This program required the BoJ to purchase Japanese Government bonds to increase the current account balance stored by financial institutions at the BoJ. (4) During the QEP the BoJ’s current account balance grew from ¥5 trillion to ¥25 trillion. (5)

What was the result?

Initially, QE did little to stimulate the economy, however by late 2005 Japan had emerged from deflation and real GDP growth was around 1% (3). In 2006 the BoJ, surrounded by this positive economic activity and an emergence from deflation, announced it would exit its QEP. (8) Unsurprisingly, however, economists at the time disagreed on the effect QE had on the Japanese economy. The current general consensus is that Japan’s early experience did little to affect its ultimate goal of inflation. (6) The BoJ felt QEP dispelled funding concerns of the financial industry, and this helped create a more stable and a more inviting financial market. This avoided worsening of the economy. In the BoJ’s words ‘when gauging the effects of the QEP broadly, the results show limited effects on raising aggregate demand and prices, despite realising more monetary easing’. (7)

So what does seems to have worked was stabilising markets through establishing clear expectations. The BoJ commitment that they would continue QE until inflation reached their target, seemed to send signals to the Japanese markets that zero interest rates was here to stay, thus influencing investment. This aided Japanese banks in liquidity and help create more risk tolerant institutions.

The positive activity that led to the BoJ exiting QE continued until 2008 when Japan returned to deflation and poor GDP growth. This deterioration occurred as Japan battled poor export growth and worsening private sector investment in the environment of the looming GFC. This slip back into recession so soon after the QEP was halted implies the QEP arguably did little to help Japan in the long run.


Reference List

  1. Bank of England, 2014, accessed 19 February 2015, <>
  2. Cassidy, J 2015, ‘All you ever (or never) wanted to know about QE’, The New Yorker, 22 January, accessed 19 February 2015, <
  3. Japan: Patterns of Development, January 1994, Accessed 19 February 2015
  4. Berkman, S Perlin 2012, ‘Bank of Japans Quantitative and Credit Easing: Are they now more effective?’, IMF working paper, January, accessed 19 February 2015, <
  5. Smith, L, ‘QE: Does it work?’, accessed 19 February 2015  <
  6. Spiegel, M 2006, ‘Did QE by the Bank of Japan “work?”’, Federal Reserve Bank of San Francisco, 20 October, accessed 19 February 2015, <
  7. Schuman, M 2010, ‘Does QE work? Ask Japan’, Time, 4 November, accessed 19 February 2015,
  8. Van Rixtel, A 2009, ‘The exit from QE (QE): The Japanese experience’, accessed 19 February 2015, <>

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

Founding sponsors




Gold sponsors



Silver sponsors