Review on Kazumasa Iwata and Shinji Takenaka’s paper: “Central bank balance sheets expansion: Japan’s experience”
The article reviewed studies the impact of unconventional monetary policies used by the Bank of Japan when the country was suffering from drop in GDP growth and substantial deflation, as well as the similar policies by other central banks. Overall, the contents emphasize on Japan’s experiences in large-scale asset purchases and spread attentions to the U.S Federal Reserve and a number of major central banks pursuing the same policy. The next important message being delivered in this paper regards the analysis on Bank of Japan’s experiences of showing forward guidance on future monetary policy to the public. In the final part, it tells that the impacts on international terms of trade and exchange rate changes have to be examined in order to evaluate the international transmission of monetary policy. This review seeks to judge the quality of the article on significance of the contents and whether the delivery method is friendly and adequate to readers. Majorly, the paperwork is deemed more than decent but, nevertheless, has rooms for certain improvements.
Throughout the study on two rounds of Japanese unconventional monetary policies by quantitative easing, Iwata and Takenaka had reached a consensus for the reason that effect on aggregate demand and deflationary expectations was limited can most likely be explained by the perception of the markets on the measures to be only temporary. They also discovered that the policy did succeed in indirect way narrowing the liquidity and risk premiums, spreads on private bonds, and reducing the long-term interest rates by pushing up the equity prices. All these results depict the achievement in forward guidance of the market by the Bank of Japan after making series of announcements about expansion of its current account targets for commercial banks, targets for monthly purchase of long term Japanese government bonds plus its commitment to sustain the 0% interest rate policy until inflation shows increment of about 1 percent annually. However, BOJ’s balance sheet expansion had exerted downward pressure on the YEN exchange rate in the first round of quantitative easing, they attributed this movement to massive foreign exchange intervention performed by the Ministry of Finance. Moreover, the evaluation produced an argument that unconventional monetary expansions at the zero bound may unknowingly result in “beggar thyself” instead of “beggar thy neighbor” effect. This was illustrated in an example of U.S as a large commodity-importing countries, oil, may actually pushed up the prices of its imported commodities through driving down the value of Dollar.
Discussing the terms of trade side of international monetary policy transmission, the authors reviewed the historical development of change in exchange rate and terms of trade (Section III), explained how exchange rate is related to the terms of trade (Section IV), and stated that the choice of invoice currency plays a critical role in determining the short term impact of exchange rate changes upon terms of trade. The major factors that influence this complex relationship throughout the discussion were found to be the choice of invoice currency, the degree of home bias with respect to domestically produced tradable goods, and cross-country differences in the relative price of tradable and non-tradable goods. Of all these factors, by Iwata and Takenaka, it is the invoice-currency-linked price setting behavior that crucially explains deterioration of terms of trade following the exchange rate appreciation over time and this significantly reflected that Japanese exporters are fond of using local currency pricing. The way monetary easing in a country being transmitted can differ as it depends on whether local currency pricing or producer’s currency pricing is adopted by domestic
