The Bank of Japan introduced quantitative easing back in 2001 after having adopted a zero interest rate policy in 1999. Almost two decades later, inflation remains well below target despite a balance sheet which is now as big as Japan’s GDP. In addition, there is increasing concern that the BoJ’s ETF purchases create distortions in share prices whereas its bond buying causes illiquidity in the JGB market. Moreover, the central bank acknowledges that structurally low rates weigh on bank profitability which may influence credit growth. However, scaling back QE would run the risk of weighing on the equity market and causing a yen appreciation. To make matters even more complex, an already huge balance sheet limits policy leeway in case of a future downturn. Eventually this could lead to a coordinated approach between the government and the central bank to boost growth.

William De Vijlder