IMF Country Report No. 11/182
Japan
2011 ARTICLE IV CONSULTATION
2011 Selected Issues
January 29, 2001
January 29, 2001
This Selected Issues paper for Japan was prepared by a staff team of the International
Monetary Fund as background documentation for the periodic consultation with the
member country. It is based on the information available at the time it was completed
on June 28, 2011. The views expressed in this document are those of the staff team
and do not necessarily reflect the views of the government of Japan or the Executive
Board of the IMF.
The policy of publication of staff reports and other documents by the IMF allows for
the deletion of market-sensitive information.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
700 19th Street, N.W. • Washington, D.C. 20431
Telephone: (202) 623-7430 • Telefax: (202) 623-7201
E-mail: publications@imf.org Internet: http://www.imf.org
International Monetary Fund
Washington, D.C.
INTERNATIONAL MONETARY FUND
JAPAN
Selected Issues
Prepared by Pelin Berkmen, W. Raphael Lam, Chad Steinberg, and Kiichi Tokuoka
Approved by the Asia and Pacific Department
June 28, 2011
Contents
Page
Executive Summary ...................................................................................................................3
I. Assessing Risks to the Japanese Government Bond Market .................................................4
A. Introduction ...................................................................................................................... 4
B. Risks to the JGB Market from Shrinking Fund Supply, Global Spillovers, and
Market Volatility ................................................................................................................... 6
Decline in Fund Supply ................................................................................................... 6
Global Spillovers ............................................................................................................. 8
Market Volatility ............................................................................................................ 10
C. Implications of a Rise in JGB Yields ............................................................................. 11
D. Summary and Conclusions ............................................................................................. 11
References ........................................................................................................................... 13
II. Bank of Japan��s Monetary Easing Measures: Are They Powerful and Comprehensive? ..14
A. Quantitative Assessment ................................................................................................ 16
Event Study Methodology ............................................................................................. 16
Impact of the BoJ��s Monetary Easing Measures on Financial Markets ........................ 18
Possible Impact of Further Asset Purchases .................................................................. 23
B. Conclusion ...................................................................................................................... 24
References ........................................................................................................................... 25
III. Bank of Japan��s Monetary Easing: Is It Now More Effective? .........................................26
A. Introduction .................................................................................................................... 26
B. The BoJ��s Experience with Quantitative Easing ............................................................ 26
C. Recent Experience in Japan and Elsewhere with Quantitative and Monetary Easing ... 27
D. Data and Estimations ..................................................................................................... 29
E. Impact of Quantitative and Monetary Easing on Activity .............................................. 30
F. Conclusions..................................................................................................................... 34
References ........................................................................................................................... 36
IV. Labor Policies to Boost Employment after the Earthquake...............................................37
2
A. Introduction .................................................................................................................... 37
B. Supporting Near-Term Employment .............................................................................. 38
Employment Support ..................................................................................................... 38
Unemployment Insurance .............................................................................................. 39
Reviving Labor Markets in the Tohoku Region ............................................................ 40
C. Boosting Overall Employment ....................................................................................... 41
Youth Employment: A New Labor Contract for New Graduates .................................. 41
Female Employment: Support for Working Mothers .................................................... 42
Elderly Employment: Raising the Retirement Age ....................................................... 44
D. Conclusions .................................................................................................................... 44
References ........................................................................................................................... 46
Tables
I.1.
Impact of Loans and Deposits on Banks�� Holdings of Government Securities ............7
I.2.
Correlation of Japanese Sovereign Yields .....................................................................9
I.3.
Factors Influencing Short-term JGB Yield Movements ..............................................10
II.1. Recent Conduct of Monetary Policy Measures by the Bank of Japan .........................15
II.2. Event Classification of Bank of Japan Monetary Easing Measures ............................17
II.3a. Impact of the Bank of Japan��s Monetary Easing Measures on Financial Markets
(Two-Trading Day Window) .......................................................................................19
II.3b. Impact of the Bank of Japan��s Monetary Easing Measures on Financial Markets
(Weekly Window) ........................................................................................................20
II.4. Impact from Fed��s Quantitative Easing Measures .......................................................22
II.5. Asset Purchase Program and Relative Market Share ...................................................24
IV.1 Unemployment Insurance Schemes .............................................................................40
IV.2 Selected Economic Indicators for the Tohoku Region ................................................41
Figures
I.1.
Overview of the JGB Market .........................................................................................5
I.2.
Global Spillovers and Volatility of the JGB Market .....................................................9
II.1. Current Status of Asset Purchase Program under the CME ........................................16
II.2. Cross-sectional Cumulative Impact of BoJ��s Monetary Easing Measures ..................21
II.3. Risk Appetite Improved following Monetary Easing Measures ..................................23
III.1. VAR with Growth and Current Account Balance at the BoJ, Full Sample .................31
III.2. VAR with Growth and Current Account Balance at the BoJ, QEP Period .................31
III.3. VAR with Growth and Current Account Balance at the BoJ, with Crisis Dummy .....32
III.4. VAR with Industrial Production and the BoJ��s Monetary Policy Actions, with Crisis
Dummy ........................................................................................................................33
III.5. VARs with Unemployment and Investment ................................................................33
IV.1. Barriers to Labor Force Reentry ..................................................................................39
IV.2. Challenges for Female Labor Participation .................................................................43
IV.3. Rural-to-Urban Migration ............................................................................................45
3
EXECUTIVE SUMMARY
The Great East Japan earthquake has had a profound impact on Japan��s economy and is
likely to influence policies for some time. The background papers for the 2011 Article IV
consultation focus on the earthquake��s implications for fiscal, monetary, and labor market
policies.
Chapter I assesses the risks to the Japanese government bond (JGB) market. Since the
earthquake, yields on JGBs have remained low. Going forward, a decline in fund supply,
particularly from the corporate sector as reconstruction spending picks up, spillovers from
global financial distress, and higher market volatility could lead to a rise in JGB yields. Over
the medium term, population aging and a recovery in risk appetite are also likely to reduce
domestic savings and the demand for safe assets. To limit these risks, fiscal policy should
aim to reduce public debt quickly and lengthen the maturity of JGBs.
Chapter II assesses whether the Bank of Japan��s (BoJ) recent easing measures are ��powerful
and comprehensive�� in affecting the financial markets. Over the course of last year, the BoJ
expanded its set of unconventional monetary easing measures to combat deflation and
support growth. Using an event study approach, the paper assesses the impact of the new
measures—in particular its asset purchase program—on financial markets and finds that they
contributed to a moderate decline in long-term interest rates, a rise in equity prices, and
reduced downside tail risks. Overall, the impact of the new measures on financial markets
has been broad-based and extends beyond the assets purchased by the BoJ.
Chapter III asks whether the BoJ��s recent experience with unconventional monetary easing
has been more effective in stimulating economic activity. Compared to the BoJ��s pre-2007
quantitative easing period, the stronger balance sheets of banking and corporate sectors could
have increased the effectiveness of the BoJ��s new easing measures. Using a VAR model, the
paper finds that the monetary easing measures after the global crisis supported economic
activity, but have had only a limited impact on inflation and no effect on the exchange rate.
While it is too early to make an overall assessment, the preliminary findings suggest that
further easing by the BoJ could help stimulate economic activity.
Chapter IV discusses how labor policies can support employment in the aftermath of the
earthquake and boost growth over the medium term. The earthquake had a significant impact
on regional and national labor markets with applications for employment insurance rising
sharply. The authorities have responded quickly by providing temporary assistance to firms
and workers. Such efforts could be further complemented by targeted training and job search
assistance. The earthquake also provides an opportunity to accelerate broader labor market
reforms and the chapter discusses measures to raise employment opportunities for women,
the young, and the old.
4
I. ASSESSING RISKS TO THE JAPANESE GOVERNMENT BOND MARKET 1
A. Introduction
1.
Since the earthquake, yields on Japanese government bonds (JGBs) have
remained low and stable. Despite expectations of additional JGBs to finance reconstruction,
10-year JGB yields have remained steady around 1.1–1.2 percent since March of this year.
The sizeable financial surpluses of the corporate and household sectors continue to provide
steady funds to the JGB market through the banking sector. Recent JGB auctions have been
met with robust demand from banks who continue to purchase short-term securities and from
life insurers and pension funds looking to lengthen the duration of their bond portfolios
(Figure I.1).
2.
These factors holding down JGB yields in the near term, however, could wane
even though the risks of a near-term disruption to the market are low. The supply of
funds for financing JGBs could decline as business investment picks up to repair the
damaged capital. Given the high correlation of JGB yields with other sovereign yields (such
as for U.S. Treasuries), a rise in global financial distress could spillover and affect the JGB
market. An unwinding of positions in the futures and swaps markets, where foreign
participation is high, could amplify these inward spillovers, and an increase in market
volatility or a sudden rise in yields could also push banks to sell JGBs to limit losses. All of
these factors could contribute to a rise in yields, worsen the public debt dynamics, and pose a
risk to financial stability.2
3.
The market��s capacity to absorb new debt is also likely to diminish gradually as
the population ages and risk appetite recovers. Japan��s large pool of domestic savings, a
stable investor base, low share of foreign ownership of JGBs, and current account surpluses
have helped maintain stability in the JGB market. But these favorable factors are likely to
diminish over time as population aging reduces household saving and a rise in risk appetite
lowers demand for safe assets. Without a significant policy adjustment, the stock of
outstanding JGBs could exceed the level of household financial assets (currently at 300
percent of GDP) within 5 to 10 years, suggesting that the government may need to turn more
to other sources, such as the corporate sector or foreign investors, to help finance its deficits.3
4.
To assess the risks to the JGB market, this paper addresses the following
questions.
•
What are the key risks to stability in the JGB market? What are the possible channels
through which global financial distress could affect JGB yields?
•
What would be the implications of high interest rates for public debt dynamics? What
should be the policy priority to mitigate the risks to the JGB market?
1 Prepared by W. Raphael Lam and Kiichi Tokuoka.
2 Yield increases in Japan could also have outward spillovers (see Japan Spillover Report, 2011).
3 See Tokuoka (2010).
5
Figure I.1. Overview of the JGB Market
JGB yields have been stable at low levels��
��amid steady demand as shown by strong auctions.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Japan
U.S.
Germany
U.K.
10-year Sovereign Yields
(In percent)
Source: Bloomberg
0
2
4
6
0
2
4
6
20
07/
1
20
08/
1
20
09/
1
20
10/
1
20
11/
1
20
11/
3
20
11/
4
20
11/
5
Bid/offer ratio
Bid/offer ratio (12-month ma)
Yields (%)
Japan: Auction Results for 10-year JGBs
Source: Ministry of Finance.
After the
earthquake
The market has been supported by stable domestic players�� ��with low reliance on foreign financing.
Central bank
8%
Banks
39%
Insurance and
pension
24%
National
pension fund
10%
Households
5%
Overseas
5%
Others
9%
Japan: Shares of JGB Holdings at end-2010
(In percent)
Source: Bank of Japan Flow of Funds statistics
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
Japan
UK
France
US
Germany
G5 Economies:
Share of Foreign Holdings of Government Bonds
(In percent)
Source: Debt Management Report 2010 (Ministry of Finance).
Corporate and households sectors have been recording
large financial surpluses ��
��which banks have used to purchase JGBs.
65
70
75
80
85
90
95
100
65
70
75
80
85
90
95
100
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
Japan: Loan-Deposit Ratio of Domestic Banks
(In percent)
Source: Haver Analytics.
-5
0
5
10
15
20
-5
0
5
10
15
20
1998
2000
2005
2010
Corporate Sector
Household Sector
Household + Corporate
Japan: Financial Surpluses
(In percent of GDP)
Source: Bank of Japan Flow of Funds Statistics
6
-2
0
2
4
6
8
10
-2
0
2
4
6
8
10
Bank of Japan
Banks
Insurance and
pension
National pension
fund
during 2009
during 2010
Japan: Net Purchases of JGBs and FBs
(In percent of GDP)
Source: Bank of Japan Flow of Funds Statistics
B. Risks to the JGB Market from Shrinking Fund Supply, Global Spillovers, and
Market Volatility
5.
In the near term, changes in fund supply, global spillovers, and market volatility
could push up interest rates, although these risks appear low at present.
Decline in Fund Supply
6.
Fund supply to the JGB market
from the corporate sector, insurers, and
pension funds could decline in the near
term due to earthquake-related damage.
Corporate financial surpluses, which
amounted to 6 percent of GDP in 2010, have
been an important source of JGB funding
through the banking system. These surpluses
could decline as corporates undertake
investment for reconstruction or expansion
overseas. Demand for JGBs from insurers
and pension funds could also weaken if insurers come under pressure to sell JGBs to settle
claims, while pension funds could accelerate payouts. One of the largest institutional
investors, the National Pension Fund, has already begun reducing assets to make payouts to
retirees.
7.
Estimating a basic demand function for government securities can help assess
the impact of a decline in corporate financial surpluses on banks�� JGB holdings. Here
we estimate the following equation:
govtsec = ��1 loans + ��2 deposits + ��3 control variables,
where
govtsec is banks�� holdings of central government securities (JGBs and FBs),4
loans is
the stock of bank loans, and
deposits is the sum of household and corporate sector deposits
(all in percent of GDP). Control variables include real GDP growth, spreads between long-
term prime lending rates and 10-year JGB yields, and CPI inflation.5 Financial surpluses of
the corporate and households sectors channeled through the banking sector are observed
when
loans decrease or
deposits increase, or both. That is, corporates and households can use
their financial surpluses either by repaying loans (
loans decrease) or making additional
deposits (
deposits increase). If financial surpluses of these sectors have a positive impact on
banks�� holdings of central government securities, the coefficients in the regressions should
4 Excluding Japan Post Bank due to data constraint.
5 These variables are included to control for business cycles and risk appetite. Including other variables (e.g.,
equity returns) to control for risk appetite does not change the results much.
7
read as
��1 < 0 and
��2 > 0
. We run regressions in level form assuming cointegration (where
estimates are robust to endogeneity).6
8.
The results suggest that a decline in financial surpluses of the corporate sector
could significantly reduce banks�� purchases of central government securities. The
estimates indicate that a 1 percentage point of GDP increase in loans would reduce banks��
holdings of central government securities by 0.3–0.6 percent of GDP, while a similar decline
in deposits would cut banks�� holdings of these securities by 0.7–0.9 percent of GDP
(Table I.1). These coefficients in turn imply that if corporate surpluses come down to zero
from 6 percent of GDP in 2010, banks�� net government security purchases could fall by
2–4 percent of GDP. This would be a sizeable reduction, about one third of annual net
government debt issuances in recent years (10 percent of GDP).
Table I.1. Impact of Loans and Deposits on Banks�� Holdings of
Government Securities 1/, 2/
Sample period: Q4 1997-
(quarterly data)
Dependent variable: banks��
holdings of central
government securities
(1)
(2)
(3)
loans
-0.56
-
-0.34
(0.067)
-
(0.031)
deposits
-
0.86
0.67
-
(0.065)
(0.044)
Num of obs
53
53
53
R-squared
0.75
0.86
0.96
1/ Cointegration is assumed. Other regressors include a lag of quarterly growth (SA), spreads between long-term
prime lending rates and 10-year JGB yields, quarterly CPI inflation, and quarter dummies.
Source: Bank of Japan Flow of Funds Statistics; Haver; CEIC.
2/ Figures in parentheses indicate (robust) standard errors. Numbers in bold indicate the 5 percent level of
significance.
9.
Based on historical trends, such a decline in corporate financial surpluses would
likely have a modest impact on yields, but a more substantial response cannot be ruled
out. Japan��s historical data suggest that the immediate impact on yields from a decline in
corporate financial surpluses to zero would be at most about 10 basis points.7 Moreover, a
recovery in tax revenue following a pickup in business activity may also reduce the fiscal
deficit and partially offset the impact on yields. However, the response of yields to a funding
shock could be nonlinear and become more significant once public debt exceeds a certain
threshold.8
6 Unit root is not rejected for
govtsec,
deposit, or
loans.
7 Estimated using regression results in Tokuoka (2010), which report that a decline in corporate and household
financial net worth of 1 percent of GDP would raise 10-year JGB yields by 1–2 basis points.
8 There is some empirical evidence consistent with the view that the impact of a rise in debt on yields is
nonlinear and becomes significant once the debt exceeds a certain threshold (e.g., Faini, 2006; Ardagna, Caselli,
and Lane, 2004).
8
Global Spillovers
10.
Global financial distress could have negative spillover effects on the JGB market
through the banking system. Japan��s sovereign yields are sensitive to global risks, including
in the U.S. Treasury and some European sovereign debt markets, where the estimated
correlation on 10-year sovereign yields ranges from 0.37 to 0.58 (Table I.2). In response to
capital losses on their foreign bond portfolios, Japanese banks could reduce their holdings of
JGBs to minimize losses. For example, late last year, the sudden rise in JGB yields mirrored
those in U.S. Treasuries (Figure I.1), as Japanese banks pared back their JGB holdings and
shortened maturities in response to losses on their U.S. Treasury holdings.
11.
Another channel for global spillover could be through the derivatives markets
where foreign participation is high. Despite low foreign ownership of JGBs (5 percent of the
total outstanding), foreign investors are active in the JGB futures market, holding about one-
third of outstanding contracts.9 Compared to domestic players, foreign investors appear to be
more sensitive to Japanese sovereign risk, as indicated by the rise in spreads on JGB CDS
contracts—traded mostly among foreign investors.10 Overseas financial distress could lead to a
rise in global yields, which could in turn amplify pressures on JGB yields through these
derivatives markets (Figure I.2).
12.
Regression analysis confirms that 10-year JGB yields in the short run are largely
driven by global risk factors and investor risk appetite. We estimate the global spillover
channel by using a time-series regression and taking into account global factors and investors��
risk appetite. The analysis uses daily data from 2005 with an ARIMA specification that
accounts for the auto-regressive and heteroscedastic features of short-term yield movements.11
Granger-causality tests show that movements in global yields generally precede those of
JGBs, though the reverse causality from JGB yields to global yields does not appear to be
statistically significant.12 The results indicate that global factors that drive U.S. Treasury and
European sovereign yields, which in turn affect the JGB yields, are significant at the 5
percent level (Table I.3). These estimates imply, for example, that a one percentage point
increase in U.S. Treasury yields (or a change in global risk factors that raise U.S. Treasury
yields by one percentage point) could increase JGB yields by nearly 15 basis points. The last
specification includes an interaction of the U.S. Treasury yields with a dummy variable that
corresponds to the peak of the global crisis after the Lehman collapse. It shows that the JGB
yields were more closely driven by the U.S. Treasury yields during the peak of the global
9 Statistical analysis, however, does not point to a particular direction of causality.
10 Japan��s CDS market is not very liquid and consists mainly of foreign hedge funds. Foreign investors looking to short
JGBs typically acquire short positions on JGB futures, or buy out-of–the-money put options on interest rate swaps.
11 The regression uses lagged variables as regressors. An autoregressive integrated moving average (ARIMA) model
applied as a statistical test on sovereign yields suggests that the time series are non-stationary. The regression includes
U.S. Treasury and German yields, and the implied volatility of JGB yields as a proxy for the investor��s risk appetite.
Other risk factors, including exchange rate volatility and term premia, are also included. These risk factors in essence
capture both domestic and external risks.
12 The hypotheses that 10-year U.S. Treasury yields and 10-year Germany sovereign yields do not Granger-cause 10-year
JGB yields are rejected with F-statistics equal to 51.7 and 35.4 (both p-values close to zero), indicating the statistical
significance at the 5 percent level. However, the reverse causality from 10-year JGB yields to 10-year U.S. Treasury
yields or 10-year Germany yields is not statistically significant, with p-values close to 0.3 and 0.2, respectively.
9
0
0.05
0.1
0.15
0.2
0.25
0.3
0
0.5
1
1.5
2
2.5
Jan-00 Nov-00 Oct-01 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07
Yield (percent)
60-day volatility (RHS)
Ten-Year Japanese Government Bond Yields and
Historical Volatility
Sources: Bloomberg.
crisis. The magnitude is statistically significant and generally robust across various
specifications. In addition, measures of investors�� risk appetite, such as the implied volatility
of JGBs, also have a strong impact on JGB yields. For example, a rise of implied volatility,
similar to what took place after the Lehman crisis, would push up JGB yields by more than
40 basis points.
Table I.2. Correlation of Japanese Sovereign Yields
Correlation with 10-year JGB yields 1/
10-year US
Treasury
yields
10-year
German bond
yields
Average yields
of adv.
countries 2/
Implied volatility
of JGB yields 3/
Entire sample: (Jan 2000 - May 2011)
0.58
0.37
0.49
0.33
Before Jan 2008
0.61
0.19
0.44
0.31
After Lehman crisis
0.62
0.87
0.75
0.39
Sources: Bloomberg and Staff estimates.
1/ Correlation coefficients refer to the correlation of 10-year JGB yields in levels and they are
all statistically significant at the 5 percent level.
2/ Average yields refer to the average of 10-year yields on U.S. Treasury, German sovereign bonds,
and U.K. Treasury bonds.
3/ Implied volatility refers to 30-day implied volatility of 10-year JGBs as calculated based
on underlying options.
Figure I.2. Global Spillovers and Volatility of the JGB Market
Foreign
institutions
36%
Securities and
brokerage
47%
Banks
16%
Other
1%
Japan: Share of Market Participants in the JGB Futures Market 1/
Sources: Bloomberg and Japan Securities Dealers Association (JSDA).
1/ Refers to the trading volume for April 2011.
0
20
40
60
80
100
120
140
160
180
0
20
40
60
80
100
120
140
160
180
Jan-08
Jun-08 Nov-08 Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
Japan
United States
Germany
United Kingdom
5-year Sovereign CDS Spreads
(Basis points)
Source: Bloomberg.
2000M1
2001M7
2003M1
2004M7
2006M1
2007M7
2009M1
2010M7
AA+
(2000M2)
AA
(2001M11)
AA-
(2002M4)
AA
(2007M4)
AA-
(2011M1)
Source: Bloomberg.
Japan: Sovereign Ratings by S&P
(Local Currency; LT-Debt)
10
Table I.3. Factors Influencing Short-term JGB Yield Movements 1/ 2/
Sample period:
Jan 2006 - May 2011
Dependent variable: 10-year JGB
yields
10-year U.S. Treasury yields
0.16
0.13
0.12
(0.01)
(0.01)
(0.01)
10-year German sovereign bond
-
0.10
0.10
yields
-
(0.02)
(0.02)
Implied volatility of JGBs 3/
0.05
0.05
0.05
(0.00)
(0.01)
(0.01)
Equity returns (Nikkei) 3/
-0.07
-0.09
-0.09
(0.03)
(0.03)
(0.03)
Term premium 3/
-
0.14
0.14
-
(0.05)
(0.05)
Dummy*U.S Treasury yields 4/
-
-
0.01
-
-
(0.00)
Log likelihood
3312
3338
3340
Num of obs
1407
1407
1407
1/ All variables included in the regression refer to the first lag.
2/ Figures in parentheses indicate the standard errors. Numbers in bold indicate
the 5 percent level of significance.
3/ Implied volatility refers to 30-day implied volatility of 10-year JGBs as calculated
based on underlying options. Equity returns measured by the first difference in logs
of Nikkei. Term premium refers to the slope between 2-year and 5-year JGBs.
4/ The dummy variable spans from September 2008 to April 2009 to include
the peak of the global financial crisis.
(1)
(2)
(3)
Market Volatility
13.
A rise in market volatility could prompt an unwinding of JGBs held by the
private sector.
• Higher interest rate volatility could induce a JGB sell-off by banks if the risk
exposures exceed the calculated thresholds of the banks�� risk management model. A
notable example was the so-called ��VaR shock�� in June 2003, when 10-year JGB
yields more than tripled over three months, surging from a historically low of
0.45 percent to 1.6 percent (Figure I.2).13 Although banks have now strengthened risk
management practices by including qualitative assessment in addition to the
quantitative risk measures in VaR models, banks�� JGB holdings are significantly
larger, suggesting that a similar shock today could still be disruptive. A possible
rating downgrade or weak JGB auctions that pushes up yields or raises volatility
could induce a sale of JGBs by banks to limit losses, which in turn could lead foreign
investors to unwind their positions in the futures and swaps markets.14
13 This episode was termed the ��VaR shock�� because the rise in volatility increased risk measures in banks��
internal value-at-risk (VaR) models and led to one-sided selling by banks as they attempted to shed risk (Bank
of Japan, 2010).
14 A large portion of JGB holdings are held in banks�� balance sheet outside the trading book such that the JGB
holdings do not need to be marked-to-market. Banks also tend to select the higher ratings on JGBs from
domestic rating agencies in assigning risk weight on their holdings of government securities. For example,
Japan Credit Rating Agency and Rating and Investment Information both assign ��AAA�� to Japanese sovereign
(continued)
11
• The rollover risks of JGBs have risen along with the government��s annual financing
requirement, which now amounts to about 55 percent of GDP (including financing
bills). Given the large amount of bonds that need to be rolled over, uncertainty over
the supply and demand of JGBs could disrupt the smooth absorption of new
issuances.15
C. Implications of a Rise in JGB Yields
14.
A potential rise in yields arising
from these risks would make fiscal
consolidation much more difficult. If
sovereign yields rise by 100 basis points over
the next 5 years, the net debt-to-GDP ratio
would remain at high levels over the long
term, even after a 10 percentage points of
GDP adjustment in the structural fiscal
balance. This would leave the fiscal position
vulnerable to interest rate or funding shocks
and risk undermining public confidence.
15.
Yield increases could also pose a
risk to banks. With banks holding a large
amount of JGBs (more than 15 percent of
total assets), a rise in yields would generate
capital losses. For example, a 100 basis point
increase in interest rates across all maturities
would generate capital losses of around
¥250 billion at the major banks and about
¥500 billion at the regional banks. This could
reduce Tier 1 capital of major banks by
10 percent and by 30 percent for regional
banks who face greater duration risks.16
D. Summary and Conclusions
16.
The JGB market has been stable since the earthquake, but the factors holding
down JGB yields could diminish over time. Since March, JGB yields have been supported
by robust demand from banks and insurance companies. However, going forward, a decline
bonds, higher than the ratings from other international rating agencies. Nevertheless, a sustained rise of
sovereign yields is likely to pose significant interest rate risks in banks�� balance sheets from unrealized losses.
15 For example, so called ��FILP shock�� took place in 1998 when yields spiked due to confusion over the
purchases of JGBs by the Fiscal Investment and Loan Program (FILP) Special Account.
16 Global Financial Stability Report (October 2010), IMF and the Financial System Report (September 2010) of
the Bank of Japan.
50
75
100
125
150
175
200
50
75
100
125
150
175
200
2005
2010
2015
2020
2025
2030
10 pct points adjustment in the
structural balance 2/, 4/
10 pct points adjustment in the structural
balance 2/ + yield hike by 100 basis points 3/
Japan: Net Public Debt 1/
(In percent of GDP)
Source: Cabinet Office; IMF WEO database; and staff estimations.
1/ Net debt of the general government including the social security fund.
2/ Assumes a 10 percent of GDP improvement of the structural primary balance between 2010-20.
3/ Yields hike by 100 basis points gradually over 5 years between 2011-16. As a result, nominal interest rate
growth differential is assumed to converge to 225 basis points over the long term (125 basis points (pre-
global financial crisis average since 2000) + 100 basis points).
4/ Nominal interest rate growth differential is assumed to converge to 125 basis points over the long term.
0
5
10
15
20
25
30
35
FY2000
FY2002
FY2004
FY2006
FY2008
FY2010
Major banks
Regional banks
Japan: Interest Rate Risk in the Banking System
(100 basis point value; in percent of Tier-1 capital)
Source: Bank of Japan
12
in fund supply, particularly from the corporate sector, spillovers from global financial
distress, and higher market volatility could create upward pressure on JGB yields. Over the
medium term, population aging and a recovery in risk appetite are also likely to reduce
domestic saving and the demand for safe assets.
17.
To limit these risks, fiscal policy should aim to reduce public debt quickly and
lengthen maturity of JGBs. Committing to a credible medium-term fiscal strategy based on
clear and specific tax and entitlement reforms could help support confidence in public
finances. Lengthening debt maturities, such as by shifting to long-dated JGBs, would also
help lock in low interest rates and guard against market volatility.
13
References
Ardagna, Silvia, Francesco Caselli, and Timothy Lane, 2004, ��Fiscal Discipline and the Cost
of Public Debt Service: Some Estimates from OECD Countries,�� NBER Working
Paper Series, No. 10788.
Bank of Japan, 2010,
Financial System Report, September.
Faini, Riccardo, 2006, ��Fiscal Policy and Interest Rates in Europe,��
Economic Policy,
Vol. 21, No. 47, pp. 443–489.
International Monetary Fund, 2011, Japan Spillover Report for the 2011 Article IV
Consultation (Washington).
International Monetary Fund, 2010,
Global Financial Stability Report, October.
Tokuoka, Kiichi, 2010, ��The Outlook for Financing Japan��s Public Debt,�� IMF Working
Paper 10/19 (Washington: International Monetary Fund).
14
II. BANK OF JAPAN��S MONETARY EASING MEASURES:
ARE THEY POWERFUL AND COMPREHENSIVE?
1
1.
The Bank of Japan (BoJ) has expanded its set of monetary easing measures to
combat deflation and support growth since late-2009 (Table II.1). The measures included
a fixed-rate funds-supplying operation, increased purchases of government securities, and a
clearer policy commitment to the zero interest rate policy
.
2.
Given the limited scope for reducing the policy rate, the BoJ embarked on a new
and innovative asset purchase program under its Comprehensive Monetary Easing (CME)
policy. The purchases in this program comprise private sector financial assets—corporate
bonds, commercial paper, exchange-traded funds (ETFs) and real estate investment trusts
(REITs)—in addition to government securities, which differ from the quantitative easing
programs of other central banks that focus more on purchases of government securities. The
objectives are to encourage a decline in long-term interest rates and reduce the risk premium.
The BoJ also introduced a new lending facility at low cost to support ��strengthening the
foundations of economic growth��. Combined with conventional monetary steps, these
measures are broad in scope and potentially powerful, helping to support lending and private
demand (Kuttner 2010).
3.
After the earthquake, the BoJ expanded its asset purchase program to stabilize
financial markets. It doubled the size of its asset purchases to ¥10 trillion in March with
plans to complete the purchases by 2012. The move was to preempt any deterioration in
business conditions and a possible rise in risk aversion. Since the earthquake, the BoJ has
increased the pace of purchases, reaching half of the target level as of end-May (Figure II.1).
4.
Against this background, this note assesses whether the BoJ��s easing measures,
particularly the asset purchase program, are powerful and comprehensive in affecting
financial markets. Using an event study similar to Gagnon et al (2010) and Neely (2010) to
assess the impact on a broad range of financial indicators, this note addresses the following
questions:
•
How did financial markets respond following the announcement of the BoJ��s easing
measures?
•
Did the impact come mostly from the announcement of the program or the subsequent
asset purchases?
•
Which asset purchases, private risky assets or government securities, are most
effective in reducing risk premia?
1 Prepared by W. Raphael Lam.
15
5.
The results suggest that the BoJ��s easing measures have had a significant and
broad-based impact on financial markets. The impact stems mainly from the
announcement effect rather than from subsequent operations or purchases. The easing
measures have eased financial conditions by lowering long-term interest rates and reducing
downside tail risks. The financial impact has also been broad-based and comprehensive,
extending beyond the assets purchased by the BoJ. These results would suggest that asset
purchases, particularly of private risky assets, could be an effective tool for further monetary
easing.
Table II.1. Recent Conduct of Monetary Policy Measures by the Bank of Japan
Measures 1/
Description
Date
Current target
scale (in ¥
trillion)
Actual bal. as of
end-May 2011 2/
Outright purchases of government
bonds
- expand measures to ensure financial stability
Dec-08
¥21.6 trillion per
year
¥61.6 trillion
Subsequent size expansion on JGB purchases
Mar-09
Fixed-rate funds-supplying
operation against pooled
collateral 3/
- provide ample funding at a very low interest rate to
banks to ease financing conditions, thereby
encouraging the decline of long-term rates.
Dec-09
¥30 trillion
¥29.6 trillion
Subsequent size expansion and maturity extension
Mar 2010 and
Aug 2010
Providing support to strengthen
the foundations for economic
growth
- provide long-term funds at low interest rates to eligible
financial institutions to finance actual investment
projects in selected industries that support the
foundations of economic growth.
Apr-10
Not exceeding
¥3 trillion
¥2.2 trillion
Subsequent announcement of operational framework,
principal terms and conditions, and disbursements.
Four times in
2010, and
twice in 2011
"Comprehensive Monetary Easing
(CME)"
Oct-10
Virtually zero-interest rate policy
- guide expectations on the duration of accommodative
stance of monetary policy
Asset Purchase Program 3/
-encourage the decline of long-term interest rates and
catalyse investors' risk appetite to reduce risk premia.
-pre-empt a deterioration in business sentiment and a
rise in risk aversion.
Mar-11
¥40 trillion
¥34.6 trillion
Source: Bank of Japan.
1/ Additional measures following the earthquake in March 2011 were introduced, including funds-supplying operation to
support financial institutions in the disaster area (March) and the new lending facility to support asset-based lending (June).
2/ Outstanding balance of government securities include previous purchases before the current easing measures introduced.
3/ The size of the asset purchase program was expanded by 5 trillion yen to 40 trillion yen on 14 March, of which 30 trillion yen
is related to the fixed-rate funds supplying operations.
16
Figure II.1. Current Status of Asset Purchase Program under the CME
0
500
1000
1500
2000
2500
3000
Nov
-10
Dec
-10
J
a
n-11
Feb-11
Mar-11
Ap
r-1
1
Ma
y
-1
1
JGBs
T-bills
in billion yen
0
500
1000
1500
2000
Nov-10
Dec
-10
Ja
n
-1
1
Feb-11
Mar-11
Ap
r-1
1
May-11
Corporate bonds
CP
in billion yen
0
200
400
600
800
1000
Nov-10
Dec
-10
J
an-11
Feb-11
Ma
r-1
1
Ap
r-1
1
Ma
y
-��
ETFs
REITs
in billion yen
Source: Bank of Japan, as of end-May 2011. Solid and dash lines represent target asset levels.
A. Quantitative Assessment
Event Study Methodology
6.
Event studies provide a useful approach for assessing the impact of policy
measures on financial markets. The financial markets typically react rapidly to ��news�� of
an event that shapes investor expectations, such as Gagnon et al. (2010), Joyce et al (2010),
and Neely (2010), which assess the impact of the U.S. Fed��s quantitative easing. This
approach, however, is not able to distinguish between the confluence of other factors,
especially those that are beyond the central bank��s control, such as external shocks. Market
anticipation before the event may also obscure the true impact, while some indirect effect
may take time to develop beyond the event window.2
7.
In this event study, the impact of monetary easing is measured as the change in
asset returns and volatility. Financial indicators include equity prices, sovereign and
corporate bond yields, exchange rates, inflation expectations, and the term premium. To
assess the significance of events, we compare the change of financial indicators around the
event window against that in a typical trading day.3 The events are linked to the BoJ��s
monetary easing measures, which include recent measures such as the introduction of the
asset purchase program last October (Table II.2). Overall, there are five events related to
initial announcements of new programs and over 30 events of subsequent expansion or
purchases.
2 For instance, the Fed��s second phase of quantitative easing in November 2010 was largely anticipated by the
market after Governor Bernanke��s speech at the Jackson Hole meeting in end-August.
3 This note uses two types of event windows: (i)
two trading days, defined to be
t+1 vs
t-1 where t refers to the
event day; and (ii) five trading days (a week). The latter allows an assessment whether the initial two-day effect
persists or wanes after a week.
17
Table II.2. Event Classification of the Bank of Japan Monetary Easing Measures
Date
Extraordinary Measures and
Powerful Monetary Easing
Introduction of New Measures
and Facilities
Program Expansion / Extension
Measure / Program
Exits
19-Dec-08
Expansion of measures to facilitate
corporate fianncing and financial
stability
Outright purchases of JGBs
22-Jan-09
Outright purchases of CP
Program expansion on purchases
of JGB
19-Feb-09
Extension of outright purcahse of
CP, corporate bonds and JGB
18-Mar-09
Extension of outright purcahse of
CP, corporate bonds and JGB
15-Jul-09
Extension of outright purcahse of
CP, corporate bonds and JGB
30-Oct-09
Exit of outright purchases
of CP
01-Dec-09
Enhancement of easy monetary
conditions
Fixed-rate funds supplying
operation against pooled collateral
(fixed rate operation)
31-Dec-09
Exit of outright purchase
of corporate bonds
17-Mar-10
Measures expanded to encourage
decline of long-term rate
Fixed-rate funds supplying
operation against pooled collateral
(fixed rate operation)
31-Mar-10
30-Apr-10
Fund provisioning measure to
support growth
30-Aug-10 Enhancement of easy monetary
conditions
Fixed-rate funds supplying
operation against pooled collateral
(fixed rate operation)
05-Oct-10 Comprehensive monetary easing
Outright purchases of CPs,
corporate bonds, ETFs, J-REITs
Fixed-rate funds supplying
operation against pooled collateral
(fixed rate operation)
28-Oct-10
05-Nov-10
14-Mar-11 Enhancement of monetary easing
Expand the size of asset purchase
program
28-Apr-11
Funds-Supplying Operation to
Support Financial Institutions in
Disaster Areas
14-Jun-11
Establish a new credit line for equity
investments and asset-based
lending.
Source: Bank of Japan
1/ The last two events on new operations in disaster areas and credit line for equity investment and asset-based lending are excluded
from the analysis.
Release of principal terms and
conditions on asset purchase
18
-30
-25
-20
-15
-10
-5
0
5
10
1-year
JGB
2-year
JGB
10-year
JGB
Corp.
yields
Exp.
Inflation
Cumulative impact from announcement
Impact from actual purchases under asset purchase program
in basis points
Announcement and Purchases Impact on financial markets
-6
-4
-2
0
2
4
6
8
10
12
14
16
Yen/USD
Nikkei
Index
JREITs
in percent
-30
-25
-20
-15
-10
-5
0
5
10
1-y
ear J
G
B
2-y
ear J
G
B
10
-y
ea
r J
G
B
In
t. ra
te
future
s
2
/
T
e
rm
p
rem
iu
m
2/
C
o
rp
. y
ields
(B
B
B
)
E
x
p
. In
flatio
n 3/
S
pot J
P
Y
/U
S
D
3
/
Nik
k
e
i 3
/
Two-day window
One-week window
Impact of Monetary Easing on Financial Markets
(in basis points, unless otherwise stated 1/)
Sources: Bloomberg and staff estimates.
1/ Events defined as the announcement dates of powerful monetary easing
by BoJ. Symbol �� denotes statistical significant at 5 percent level.
2/ Refers to 3-month interest rate futures and term premium defined as
10-year net of 2-year sovereign yields.
3/ in percent.
����
��
���� ���� ���� ����
����
Impact of the BoJ��s Monetary Easing Measures on Financial Markets
8.
Overall, the BoJ��s monetary easing measures have had a favorable impact on
financial markets (text chart). This positive impact is broad-based and extends beyond the
assets that the BoJ purchases. Specifically;
•
Government securities. Sovereign yields across all maturities declined in three out of the
five events at the 5 percent significant level. The 10-year JGB yield fell by a cumulative
24 basis points while the 2-year JGB yield fell by 14 basis points compared to a 0.1 basis
point of change in a typical trading day
(Table II.3a). The initial fall in sovereign yields
appears to persist and reinforces the decline in the
following week (Table II.3b).
•
Corporate bonds. Corporate yields across
investment grades cumulatively decreased by
about 15 basis points in the two-day window,
though the impact stayed broadly the same
throughout the week. Bond issuance also
improved following the announcement of the
asset purchase program.
•
Equity markets. Stock and futures markets strengthened in four out of the five easing
events, cumulatively increasing by 5–7 percent, in the following week.
•
Real estate investment trusts (REITs). Prices of REITs in particular, surged following the
monetary easing events, reflecting large BOJ purchases in a relatively small market.
9.
The BoJ��s easing measures, however, have had no appreciable impact on the yen
exchange rates and inflation expectations. The spot and forward yen rates against the
dollar changed little. Inflation expectations derived from breakeven rates remained
unchanged within the event windows.
10.
Most of the impact on financial markets came from the announcement of new
easing measures, rather than from subsequent purchases. Under the asset purchase
program, the announcement effect outweighed that
of the actual purchases, which often had only a
modest impact on financial indicators (text chart).
The purchases of ETFs or REITs however, were
usually associated with a fall in equity prices during
the event windows, possibly suggesting the
purchases aim to support asset prices.
Announcements to expand the measures (size or
duration) or exits from earlier monetary easing
measures had a modest impact on financial markets.
19
Table II.3a. Impact of the Bank of Japan��s Monetary Easing Measures on Financial Markets (Two-Trading Day Window)
(in basis points, unless otherwise stated 1/ 2/)
Date
Events
short-term
interest rate
Inflation
expectation
5/
1-year
JGB
2-year
JGB
10-year
JGB
1-year
future
3-month
futures 3/
short-
end
long-end
5-year
breakeven
Spot rate
3-month
forward rates
AA-rated BBB-rated
Nikkei
Nikkei
futures
Implied
volatility
J-REITs
19-Dec-08
Outright purchase of government bonds and
commercial papers
-7.3
-7.7
-7.3
-2.6
-7
0.90
0.40
-
0.93
0.84
-0.06
-0.01
0.65
0.92
-7.05
3.91
(0.00) (0.00)
(0.02) (0.24)
(0.00)
(0.24)
(0.46)
-
(0.11)
(0.13)
(0.03)
(0.38)
(0.32)
(0.26)
(0.00)
(0.00)
01-Dec-09
Enhancement of easy monetary conditions
-4.3
-4.5
-5.8
-3.8
-6.5
-0.90
-1.30
-0.03
1.12
1.12
-0.06
0.00
2.82
3.22
-2.53
5.74
(0.00) (0.02)
(0.05) (0.15)
(0.00)
(0.26)
(0.34)
(0.28)
(0.07)
(0.07)
(0.04)
(0.48)
(0.03)
(0.01)
(0.06)
(0.00)
17-Mar-10
Expansion of measures to encourage decline
of long-term rate
-0.1
0.5
2.7
3.4
1.5
-0.10
2.20
0.03
0.08
0.07
0.03
0.00
0.21
0.19
-1.45
1.19
(0.48) (0.37)
(0.21) (0.17)
(0.09)
(0.48)
(0.26)
(0.38)
(0.43)
(0.43)
(0.20)
(0.48)
(0.43)
(0.44)
(0.19)
(0.19)
30-Aug-10
Enhancement of easy monetary conditions
-0.3
-1.5
-3.9
-3.5
-0.5
-1.10
-2.40
-0.02
-1.20
-1.20
-0.04
-0.05
-1.86
-1.90
3.20
1.17
(0.45) (0.26)
(0.14) (0.17)
(0.35)
(0.21)
(0.23)
(0.37)
(0.08)
(0.08)
(0.13)
(0.14)
(0.11)
(0.10)
(0.02)
(0.19)
05-Oct-10
Comprehensive monetary easing
-1.1
-0.9
-10
-5.4
0
-0.40
-9.10
-0.01
-0.50
-0.50
-0.09
-0.09
3.31
3.74
-1.17
2.25
(0.23) (0.36)
(0.00) (0.07)
(0.48)
(0.39)
(0.00)
(0.78)
(0.29)
(0.29)
(0.00)
(0.02)
(0.01)
(0.00)
(0.24)
(0.05)
Cumulative sum
-13.1
-14.1
-24.3
-11.9
-12.5
-1.6
-10.2
-0.03
0.43
0.34
-0.22
-0.15
5.13
6.17
-9.00
14.26
(0.00) (0.00)
(0.00) (0.08)
(0.00)
(0.31)
(0.07)
(0.32)
(0.34)
(0.36)
(0.00)
(0.06)
(0.05)
(0.03)
(0.01)
(0.00)
various dates
Introduction of new measures / facilities
-13.1
-15.9
-21.8
-12.6
-11.5
-2.2
-5.9
-0.1
1.3
1.2
-0.2
-0.1
6.0
7.1
-14.2
18.5
(see supp. Table for event classification)
(0.00) (0.00)
(0.00) (0.07)
(0.00)
(0.25)
(0.19)
(0.26)
(0.18)
(0.20)
(0.00)
(0.16)
(0.03)
(0.01)
(0.00)
(0.00)
various dates
Expansion of selected easing measures
-1.8
-12.0
-1.4
-3.3
4.0
1.5
10.6
0.1
-4.9
-4.8
0.0
-0.1
-0.4
-1.3
-4.5
5.7
(see supp. Table for event classification)
(0.44) (0.03)
(0.47) (0.41)
(0.09)
(0.32)
(0.15)
(0.45)
(0.03)
(0.03)
(0.48)
(0.37)
(0.49)
(0.40)
(0.17)
(0.07)
various dates
Exits of selected measures / facilities
0.2
-2.7
-2.1
-2.8
1.0
0.1
0.6
0.0
-0.2
-0.2
0.0
0.0
0.0
0.4
-1.9
4.1
(see supp. Table for event classification)
(0.39) (0.27)
(0.38) (0.35)
(0.28)
(0.46)
(0.48)
(0.48)
(0.49)
(0.49)
(0.49)
(0.47)
(0.48)
(0.43)
(0.25)
(0.04)
Control groups:
Typical trading day
mean
-0.2
-0.2
-0.1
-0.1
-0.06
-0.04
0.10
0.01
-0.07
-0.06
0.00
0.00
-0.04
-0.03
-0.01
0.00
standard deviation
1.31
2.01
3.46
3.60
1.17
1.32
3.31
0.07
0.80
0.80
0.03
0.04
1.47
1.45
1.61
1.35
MPC releases (Jul
08-Dec 10)
MPC meeting releases exclude monetary
easing annoucements
mean
-0.5
-0.9
-1.1
-0.7
-0.34
-0.59
-0.21
0.01
-0.12
-0.12
-0.01
0.00
-0.89
-0.90
1.41
-0.58
standard deviation
1.96
3.24
3.36
4.65
2.39
2.37
4.67
0.08
1.28
1.31
0.03
0.05
2.61
2.74
3.17
3.06
Source: Bank of Japan, Bloomberg, staff calculations.
1/ Sample period from 1 Jul 2008 to 11 Jan 2011. All changes refer to an event window of 2 trading days, defined as the values at day t+1 net of day t-1
where t denotes the day of event annoucement.
2/ Parentheses indicate the p-values relative to typical trading day control group. Numbers in bold if beyond 5-percent (p-value<0.05) significant level.
3/ Constant maturity zero coupon bonds for 2-year and 10-year horizon.
4/ An increase (+) denotes yen depreciation; in percent.
5/ in percent.
Exchange rate JPY/USD
4/ 5/
Corporate yields 5/
Term premium
(yield curve)
Equity market 5/
Government bond
20
Table II.3b. Impact of the Bank of Japan��s Monetary Easing Measures on Financial Markets (Weekly Window)
(in basis points, unless otherwise stated 1/ 2/)
Date
Events
short-term
interest rate
Inflation
expectation
5/
1-year
JGB
2-year
JGB
10-year
JGB
1-year
future
3-month
futures 3/
short-
end
long-end
5-year
breakeven
Spot rate
3-month
forward rates
AA-rated BBB-rated
Nikkei
Nikkei
futures
Implied
volatility J-REITs
19-Dec-08
Outright purchase of government bonds and
commercial papers
-15.7
-13.3
-16
-4.8
-11.5
-0.40
-2.70
-
1.35
1.30
-0.17
-0.03
1.82
2.10
-12.27
2.84
(0.00) (0.00)
(0.00) (0.20)
(0.00)
(0.42)
(0.27)
-
(0.07)
(0.08)
(0.00)
(0.32)
(0.18)
(0.19)
(0.00)
(0.04)
01-Dec-09
Enhancement of easy monetary conditions
-4.9
-6.7
-7.7
-5.8
-6.5
-3.40
-1.00
-0.04
0.92
0.90
-0.08
0.00
2.41
2.56
-0.14
3.37
(0.03) (0.02)
(0.07) (0.15)
(0.02)
(0.03)
(0.41)
(0.31)
(0.14)
(0.14)
(0.04)
(0.46)
(0.12)
(0.15)
(0.49)
(0.02)
17-Mar-10
Expansion of measures to encourage decline
of long-term rate
-0.6
0.9
0.8
2.5
-4
1.00
-0.10
0.00
-0.20
-0.21
0.03
0.00
-0.07
0.09
-1.34
2.14
(0.47) (0.33)
(0.41) (0.29)
(0.11)
(0.28)
(0.49)
(0.43)
(0.46)
(0.47)
(0.20)
(0.46)
(0.47)
(0.45)
(0.28)
(0.10)
30-Aug-10
Enhancement of easy monetary conditions
-0.5
-0.5
4.9
0.5
0.5
-0.60
5.40
0.00
-0.43
-0.42
0.07
0.05
-0.24
-0.34
0.85
1.24
(0.48) (0.49)
(0.14) (0.43)
(0.39)
(0.38)
(0.12)
(0.43)
(0.45)
(0.46)
(0.04)
(0.15)
(0.50)
(0.48)
(0.33)
(0.21)
05-Oct-10
Comprehensive monetary easing
-0.9
-2.9
-9.3
-5.7
-0.5
-1.50
-6.40
0.01
-0.69
-0.69
-0.08
-0.09
3.44
3.63
-3.06
3.40
(0.42) (0.20)
(0.03) (0.15)
(0.48)
(0.21)
(0.08)
(0.93)
(0.36)
(0.36)
(0.04)
(0.06)
(0.05)
(0.08)
(0.08)
(0.02)
Cumulative sum
-22.6
-22.5
-27.3
-13.3
-22
-4.90
-4.80
-0.04
0.95
0.89
-0.22
-0.07
7.35
8.05
-15.96
12.99
(0.00) (0.00)
(0.01) (0.16)
(0.00)
(0.12)
(0.31)
(0.32)
(0.16)
(0.17)
(0.02)
(0.35)
(0.05)
(0.06)
(0.00)
(0.00)
various dates
Introduction of new measures / facilities
-22.4
-24.2
-36.2
-20.8
-14.5
-6.4
-12.0
0.0
0.9
0.8
-0.4
-0.5
0.1
0.6
-7.3
13.4
(see supp. Table for event classification)
(0.00) (0.00)
(0.00) (0.05)
(0.03)
(0.06)
(0.12)
(0.30)
(0.17)
(0.19)
(0.00)
(0.00)
(0.40)
(0.39)
(0.07)
(0.00)
various dates
Expansion of selected easing measures
-2.3
-17.0
-3.9
-16.6
-10.3
-2.9
20.9
0.1
-4.2
-4.2
0.1
-0.1
-2.0
-2.1
3.5
15.6
(see supp. Table for event classification)
(0.44) (0.05)
(0.47) (0.18)
(0.18)
(0.31)
(0.06)
(0.49)
(0.28)
(0.28)
(0.23)
(0.31)
(0.49)
(0.49)
(0.24)
(0.00)
various dates
Exits of selected measures / facilities
0.5
-4.9
3.2
-4.0
1.0
-1.8
8.1
0.04
1.3
1.3
0.0
0.0
-4.2
-4.1
0.9
8.4
(see supp. Table for event classification)
(0.34) (0.23)
(0.31) (0.38)
(0.35)
(0.29)
(0.16)
(0.48)
(0.13)
(0.13)
(0.37)
(0.44)
(0.18)
(0.23)
(0.37)
(0.00)
Control groups:
Sample period
Typical trading day
mean
-0.4
-0.4
-0.3
-0.4
-0.33
-0.05
0.05
0.02
-0.30
-0.30
0.00
0.00
-0.23
-0.23
-0.09
-0.13
standard deviation
2.37
2.95
4.87
5.15
2.96
1.77
4.59
0.11
1.12
1.12
0.04
0.05
2.27
2.69
2.10
1.73
MPC releases (Jul
08-Dec 10)
MPC meeting releases exclude monetary
easing annoucements
mean
-0.2
-1.2
-1.0
-0.8
-0.92
-0.70
0.27
0.02
-0.31
-0.31
-0.01
-0.01
-0.84
-0.95
1.74
-1.35
standard deviation
3.54
3.24
3.36
4.65
2.39
2.37
4.67
0.08
1.28
1.31
0.03
0.05
4.21
4.68
4.04
3.97
Source: Bank of Japan, Bloomberg, staff calculations.
1/ Sample period from 1 Jul 2008 to 11 Jan 2011. All changes refer to an event window of 2 trading days, defined as the values at day t+1 net of day t-1
where t denotes the day of event annoucement.
2/ Parentheses indicate the p-values relative to typical trading day control group. Numbers in bold if beyond 5-percent (p-value<0.05) significant level.
3/ Constant maturity zero coupon bonds for 2-year and 10-year horizon.
4/ An increase (+) denotes yen depreciation; in percent.
5/ in percent.
Government bond
Term premium
(yield curve)
Exchange rate JPY/USD
4/ 5/
Corporate yields 5/
Equity market 5/
21
11.
Across sectors, the BOJ��s measures have had the largest impact on the financial
and real estate sectors. Stock prices of the financial sector, notably the major banks and
insurance companies, rose strongly relative to the market index (adjusted by the industry
beta). This could partly reflect financial institutions�� lower financing cost and their large
holdings of government securities. By contrast, equity prices in other sectors did not show
significant excess returns compared to the overall market, regardless of their size or credit
status (Figure II.2).
Figure II.2: Cross-sectional Cumulative Impact of BoJ��s Monetary Easing Measures
0
5
10
15
20
25
30
2-day window
One-week window
beta-adjusted returns (2-day)
beta-adjusted returns (5-day)
Cumulative Impact of Monetary Easing
Announcements on Financial Sector
(in percent)
���� ����
����
����
0
2
4
6
8
10
12
14
2-day window
One-week window
beta-adjusted return (2-day)
beta-adjusted return (5-day)
Cumulative Impact of Monetary Easing
Announcements on Corporate Sector
(in percent; by size and credit status)
Sources: Bloomberg and staff estimates.
1/ Events are defined as in the text. Beta-adjusted return is calculated as industry beta*market return. Symbol �� denotes
statistical significant at the 5 percent level from the adjusted returns.
12.
The BOJ��s easing measures have generated similar effects on financial markets
compared to the actions by the U.S. Fed, but with two notable exceptions.4 Asset prices
responded strongly in both the United States and Japan following the announcements of their
monetary easing measures (Table II.4). By contrast, the Fed��s large-scale asset purchases
have had a stronger impact on global financial markets, including Japan and the euro-area,
compared with no such global spillovers from the BoJ��s measures. Second, the Fed��s easing
measures were found to have influenced the dollar exchange rates and domestic inflation
expectations (D��Amico and King 2010, Yellen 2011), while the BoJ��s measures appeared to
have no such effect. This could reflect greater linkages of the United States to global
financial markets.
13.
Besides raising asset prices, the asset purchase program appears to have lowered
tail risks in financial markets. Implied volatility in the equity market fell cumulatively by
10 percent (significant at 5 percent level) after the BoJ��s easing, suggesting an improvement
of investors�� risk appetite. Markets�� perceived risk of a double-dip recession also receded, as
23
4 The Fed announced purchases of government securities and mortgage-backed securities in December 2008.
The Fed purchased securities across the yield curve, with maturities from 3 months to 30 years, but bought most
heavily in 4- to 10-year maturities. The rate of purchase was broadly steady and varied with liquidity.
22
Table II.4. Impact of the Fed��s Quantitative Easing Measures
(in basis points, unless otherwise stated 1/ 2/)
Date
Events
short-term
interest
rate
1-year
Treasury
bonds
2-year
Treasury
bonds
10-year
Treasury
bonds
1-year
future
3-month
futures 3/
short-
end
long-
end
Expected
inflation
Spot
rate
3-month
forward
rates
AA-
rated
BBB-
rated
Stock
index
Index
futures
Implied
volatility J-REITs
25-Nov-08
Initial announcement of monetary easing through LSAP
United States
-2
-18.7
-41.9
-31.6
-1.25
-1.6
-23.2
0.4
0.3
0.3
-0.02
-0.03
4.2
4.5
-15.1
-
(0.41)
(0.02)
(0.00) (0.00)
(0.47)
(0.38)
(0.00)
(0.00)
(0.32)
(0.32)
(0.48) (0.47)
(0.00)
(0.00)
(0.00)
-
Japan
3.8
4
-2.6
-0.2
3
0.5
-6.6
-
-1.7
-1.7
0.0
0.0
3.8
2.4
-5.9
7.5
(0.00)
(0.02)
(0.23) (0.49)
(0.04)
(0.34)
(0.02)
-
(0.06)
(0.06)
(0.18) (0.26)
(0.02)
(0.11)
(0.00)
(0.01)
Euro-area or Germany
0
0
-14.6
-16.2
7.5
-1.6
-14.6
0.079
-0.5559
-0.38015
2.4
-1.8
0.1355
0.3385
-9.2047
-
(0.42)
(0.45)
(0.04) (0.02)
(0.08)
(0.38)
(0.01)
(0.17)
(0.34)
(0.39)
(0.29) (0.42)
(0.48)
(0.44)
(0.13)
-
21-Sep-10 FOMC release following Bernanke's speech at Jackson Hole
United States
-3
-7.1
-10.5
-10.3
-2.5
-3.7
-3.4
0.0
0.6
0.6
-0.25
-0.24
1.8
2.1
-4.9
-
(0.36)
(0.22)
(0.19) (0.15)
(0.41)
(0.25)
(0.32)
(0.44)
(0.16)
(0.16)
(0.15) (0.19)
(0.12)
(0.09)
(0.12)
-
Japan
-0.3
-1.1
-4.4
-4.2
0.5
-0.2
-3.3
-
-1.4
-1.37
-0.04
-0.05
-0.62
-0.52
0.61
1.13
(0.46)
(0.33)
(0.11) (0.13)
(0.37)
(0.45)
(0.15)
-
(0.10)
(0.11)
(0.13) (0.09)
(0.37)
(0.39)
(0.35)
(0.36)
Euro-area or Germany
0.2
-6.6
-8.9
-12.1
-3
-2.1
-2.3
-0.13
2.63
2.58
-5.50
-5.50
-1.37
-1.24
4.15
-
(0.41)
(0.24)
(0.14) (0.07)
(0.38)
(0.35)
(0.33)
(0.08)
(0.01)
(0.02)
(0.18) (0.18)
(0.26)
(0.28)
(0.31)
-
03-Nov-10 Expansion of monetary easing (QE2)
United States
-1
-1.4
-9.4
-12.2
-0.5
1.6
-8
-0.2
0.1
0.7
-0.14
-0.17
2.3
2.2
-14.1
-
(0.47)
(0.46)
(0.21) (0.11)
(0.49)
(0.40)
(0.15)
(0.02)
(0.44)
(0.12)
(0.28) (0.27)
(0.07)
(0.08)
(0.00)
-
Japan
-0.1
-0.8
-2.4
-2
0
-0.1
1.6
-
0.2
0.2
0.0
0.0
2.2
2.1
-2.4
(0.48)
(0.38)
(0.25) (0.30)
(0.48)
(0.48)
(0.33)
-
(0.47)
(0.46)
(0.38) (0.33)
(0.13)
(0.14)
(0.07)
(0.50)
Euro-area or Germany
-3.5
-0.1
2.6
-4.3
-1
1.6
2.7
-0.1
1.2
1.1
-3.5
-4.4
1.2
1.1
-9.5
-
(0.34)
(0.46)
(0.35) (0.31)
(0.50)
(0.40)
(0.38)
(0.27)
(0.13)
(0.16)
(0.30) (0.24)
(0.30)
(0.31)
(0.12)
-
Cumulative sum across various annoucement dates
United States
-27.0
-45.8
-105.5
-93.8
-79.04
-8.25
-71.88
0.40
5.03
4.87
-1.26
-1.52
3.73
3.66
-8.76
-
(0.15)
(0.07)
(0.00) (0.00)
(0.00)
(0.30)
(0.00)
(0.12)
(0.01)
(0.01)
(0.05) (0.04)
(0.23)
(0.24)
(0.22)
-
Japan
-6.7
-13.0
-12.3
-15.6
-26.90
-2.70
0.70
-
-11.96
-11.80
-0.11
0.04
-1.20
-3.06
-13.54
19.33
(0.11)
(0.04)
(0.15) (0.10)
(0.00)
(0.28)
(0.48)
-
(0.00)
(0.00)
(0.17) (0.32)
(0.42)
(0.30)
(0.00)
(0.02)
Euro-area or Germany
-47.4
-55.3
-73.2
-80.5
-91.90
-11.30
-17.90
-0.62
3.57
3.38
-21.00 -28.80
-0.47
0.13
-4.53
-
(0.02)
(0.04)
(0.00) (0.00)
(0.00)
(0.24)
(0.13)
(0.02)
(0.12)
(0.15)
(0.19) (0.10)
(0.46)
(0.49)
(0.42)
-
Control group:
1843
Typical trading day
United States
-0.6
-0.5
0.0
-0.1
-0.64
0.14
0.46
0.00
-0.02
-0.02
-0.01
-0.01
0.01
0.01
0.17
-
standard deviation
6.5
8.6
11.8
9.9
8.08
5.71
8.31
0.10
0.65
0.63
0.23
0.3
1.54
1.57
4.26
-
Japan
-0.2
-0.2
-0.1
-0.1
-0.11
-0.03
0.12
-
0.06
0.06
0.00
0.0
0.01
0.01
-0.01
0.02
standard deviation
1.3
2.0
3.5
3.6
1.82
1.31
3.33
-
1.15
1.16
0.03
0.04
1.91
1.94
1.61
3.06
Euro-area or Germany
-1.1
-1.0
-0.4
-0.5
-1.07
0.14
0.62
0.00
-0.07
-0.05
-0.62
-0.7
0.02
0.03
0.09
-
standard deviation
5.7
8.1
7.9
7.69
6.2
5.71
6.73
0.09
1.17
1.22
5.39
5.4
2.21
2.21
8.11
-
Source: Bank of Japan, Federal Reserve Board, European Central Bank, Bloomberg, and staff calculations.
1/ Sample period from 1 Jul 2008 to 11 Jan 2011. All changes refer to an event window of 2 trading days, defined as the values at day t+1 net of day t-1
where t denotes the day of event annoucement.
2/ Parentheses indicate the p-values relative to typical trading day control group. Numbers in bold if beyond 5-percent (p-value<0.05) significant level.
3/ Constant maturity zero coupon bonds for 2-year and 10-year horizon.
4/ Percentage increase (+) denotes currency depreciation against USD. For USD, exchange rate refers to nominal trade-weighted rate.
5/ in percent.
Government bond
Term premium
(yield curve)
Exchange rate 4/ 5/
Corporate
yields 5/
Equity market 5/
23
-60
-50
-40
-30
-20
-10
0
long-term
JGB yields
Corporate
bond yields
¥1 tr JGB purchase
¥1 tr corp bond & CP purchase
¥1/2 tr equity purchase
Impact of Hypothetical Expansion of Asset Purchase
Program beyond the Current Target Levels
(in basis points)
Sources: staff estimate and Neely (2010).
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Equity asset return (in
percent)
indicated by the decline in the implied volatility of out-of-the-money call and put options—a
measure of the cost of insuring against extreme tail risk events. And business and consumer
confidence generally improved following an easing event (Figure II.3). The BoJ��s easing
likely contributed to stabilizing Japan��s economy and narrowing the perceived distribution of
risks surrounding the outlook (Baumeister and Benati 2011).
Figure II.3. Risk Appetite Improved following Monetary Easing Measures
0
20
40
60
80
100
120
0
10
20
30
40
50
60
Jan-08
A
p
r-08
Jul-08
Oct-08
Jan-09
A
p
r-09
Jul-09
Oct-09
Jan-10
A
p
r-10
Jul-10
Oct-10
Jan-11
A
p
r-11
VIX for Nikkei (RHS)
Current conditions
Future conditions
Implied Volatility and Economy
Watchers Survey (diffusion index)
Source: Cabinet office.
Vertial lines indicate monetary easing events.
-50
-30
-10
10
30
50
70
90
0
20
40
60
80
100
120
140
160
180
J
an-08
Ma
r-0
8
Ma
y
-0
8
Ju
l-0
8
Se
p
-0
8
No
v
-0
8
J
an-09
Ma
r-0
9
Ma
y-0
9
Ju
l-0
9
S
ep-09
No
v
-0
9
J
an-10
Ma
r-1
0
Ma
y-1
0
Ju
l-1
0
S
ep-10
No
v
-1
0
J
an-1
1
Ma
r-1
1
VIX--Implied volatility of Nikkei (1-month; LHS)
Tail-risk measure based on skewness of implied volatility from out-of-money options
(1-month historical moving average; RHS)
Pricing of Extreme Tail Risk and VIX on Nikkei
Lehman crisis
Great East
Japan
Earthquake
Sources: Bloomberg and staff estimates.
European
debt crisis
(e.g., Greece)
Possible Impact of Further Asset Purchases
14.
Increased purchases of private assets
could further support financial markets. The
evidence suggests that BoJ��s asset purchases
have been effective in reducing term and risk
premia, and if expanded, could further support
asset prices. Using a portfolio rebalancing model
similar to Neely (2010), an additional purchase
of ¥1 trillion of government securities beyond
the current target level would have limited
impact on sovereign yields and equity markets,
especially given the already-low level of interest rates (see chart). However, the same amount
of additional purchases of corporate bonds and commercial paper would have a larger impact
by lowering the risk premium in the corporate sector. In addition, based on the above model,
purchasing additional ¥½ trillion equities-related assets would reduce long-term sovereign
yields by about 30 basis points and raise equity prices by 3 percent (Berkmen, 2011).
15.
Expanding the asset purchase program is unlikely to crowd out private
transactions in financial markets. The BoJ��s asset purchase program is small relative to the
total market share, even if it was fully used, perhaps with an exception in the real estate
investment trust (Table II.5). Further expansion of asset purchases, particularly corporate
24
bonds and ETFs, could further ease monetary conditions and support market confidence
without crowding-out market investors.
Table II.5. Asset Purchase Program and Relative Market Size
(in trillions of yen)
1/
Target level
1/
Amount
outstanding (as
of end-May
2011)
Market
capitalization /
outstanding
amount
Asset purchases
Government securities 2/
5.0
3.0
850.0
Commercial paper
2.0
1.2
15.0
Corporate bonds
2.0
0.5
60.8
Exchange-traded funds 3/
0.9
0.3
457.4
Real estate investment trusts
0.1
0.0
3.2
Subtotal
10.0
5.0
-
Fixed-rate fund-supplying operation
against pooled collateral
30.0
29.6
-
Total
40.0
34.6
-
Sources: Bank of Japan, Tokyo Stock Exchange, Japan Securities Dealers Association.
1/ Target level was raised from ¥35 to 40 trillion after the earthquake in
mid-March 2011.
2/ Includes government bonds and Treasury bills.
3/ Market capitalization refers to the equities markets in Tokyo Stock Exchange.
16.
On balance, the purchases of private assets so far represent only a small amount
relative to the size of the BoJ��s balance sheet. The outstanding amount of risky assets held
by the BoJ is less than ¥1½ trillion as of end-May, and would reach ¥5 trillion when the
target level is met. This would amount to about 3½ percent of the total balance sheet,
suggesting the risk to its balance sheet from asset purchases would still remain relatively
modest. While the risk to the credibility or independence of the BOJ is more difficult to
assess, anecdotal evidence from financial markets suggests this risk is also low.
B. Conclusion
17.
The BoJ��s easing measures have had a significant and broad-based impact on
financial markets. The impact stems mainly from the announcement effect rather than from
the actual operations or purchases. The easing measures have contributed to a decline in
long-term interest rates and lowered downside tail risks, thereby helping to support investors��
risk appetite. Furthermore, the impact has been broad-based and comprehensive, extending
beyond the assets purchased by the BoJ. These results argue well for further monetary easing
through asset purchases, particularly of private sector assets.
25
References
Baumeister, C. and L. Benati, 2011, ��Unconventional Monetary Policy and the Great
Recession,�� Manuscript.
Berkmen, P., 2011, ��Bank of Japan��s Monetary Easing: Is It Now More Effective?,�� Selected
Issues Paper, Japan Article IV Consultation Staff Report.
D��Amico S., and T. King, 2010, ��Flow and Stock Effects of Large-Scale Treasury
Purchases,�� Federal Reserve Board, Staff Working Papers in the Finance and
Economics Discussion Series (FEDS), Vol. 2010-52.
Gagnon, J., M. Raskin, J. Remache, and B. Sack, 2010, ��Large Scale Asset Purchases by the
Federal Reserve: Did They Work?,�� Federal Reserve Bank of New York, Staff
Reports, No.441, March.
Kuttner, K., 2010, ��The Fed��s Response to the Financial Crisis: Pages from Bank of Japan
Playbook, or a Whole New Ball Game?,�� Policy Research Institute, Ministry of
Finance, Japan, Public Policy Review: Vol. 6/3, March.
Neely C., 2010, ��The Large-Scale Asset Purchases Had Large International Effects,�� Federal
Reserve Bank of St. Louis, Working Paper, October 2010.
Joyce, M., Lasaosa A., Stevens, I., and Tong, M., 2010, ��The Financial Market Impact of
Quantitative Easing,�� Bank of England Working Paper No 393, July.
Yellen J., 2011, ��Unconventional Monetary Policy and Central Bank Communications,��
Speech at the U.S. Monetary Policy Forum, New York on February 25.
26
III. BANK OF JAPAN��S MONETARY EASING: IS IT NOW MORE EFFECTIVE?1
A. Introduction
1.
Japan has had long experience with quantitative easing, dating back to 2001.
Following a period of zero interest rate policy (ZIRP) during 1999-2000, the Bank of Japan
(BoJ) introduced quantitative easing in March 2001. Under this policy, the BoJ used
purchases of JGBs as the main instrument to reach their operating target of current account
balances (CAB) held by financial institutions at the BoJ. The BoJ exited quantitative easing
in March 2006, amid signs that deflation was easing. Following the global financial crisis,
the BoJ increased the pace of its JGB purchases and adopted a number of other
unconventional measures to promote financial stability, and then in October last year, it
introduced its Comprehensive Monetary Easing (CME) policy in response to the re-
emergence of persistent deflation and a slowing recovery. This new policy initiated an asset
purchase program involving risky private assets as well as government securities.
2.
Research on the effectiveness of earlier quantitative easing yielded mixed results,
with most pointing to limited effects on economic activity. While most papers found
evidence that quantitative easing helped reduce yields, its effect on economic activity and
inflation was found to be small. The reasons cited included a dysfunctional banking sector,
which impaired the credit channel, and weak demand for loans during a period when
corporates were deleveraging. The situation since then, however, has improved, with a
strengthening of banks�� balance sheets and restructuring of the corporate sector since the
banking crisis of the late 1990s.
3.
This paper revisits the question of whether quantitative easing and other
unconventional monetary easing measures in Japan are now more effective given
improvements in the banking and corporate sectors. Specifically, this paper assesses
impact of monetary easing on economic activity and inflation taking into account the more
recent monetary policy measures. The paper finds that monetary easing has indeed supported
economic activity, but with limited impact on inflation. The results here, along with the
companion event study analysis of the BoJ��s asset purchase program (Lam, 2011), suggest
that further easing, including through the purchases of private assets could be more effective
compared to the past in stimulating economic activity.
B. The BoJ��s Experience with Quantitative Easing
4.
Japan��s earlier experience with the quantitative easing suggests that the BoJ��s
monetary policy actions have helped reduce yields (see Ugai, 2007 for a survey). During
the quantitative easing period 2001—2006, CABs rose gradually from about ¥5 trillion to a
peak of ¥36 trillion in 2004 before declining at the end of quantitative easing period in 2006.
1 Prepared by S. Pelin Berkmen.
27
To meet the CABs-targets, the BoJ used mainly purchases of long-term JGBs.2 Earlier
studies focused on various transmission channels, which include: commitment effects to keep
expected interest rates low for an extended period; and portfolio rebalancing and signaling
effects from the expansion of the balance sheet and increased purchases of long-term JGBs.
The commitment effect was found to be the strongest. The evidence on portfolio balancing
and signaling effects, however, was mixed with some finding positive evidence that higher
CABs and long-term JGB purchases lowered yields and credit spreads.
5.
The impact on economic activity,
however, was found to be limited. While
some papers suggested that quantitative
easing helped create a more accommodative
environment for corporate financing and
improved the lending attitude of financial
institutions, the impact on economic activity
and inflation was rather limited (see Ugai
2007 for a survey). The reason commonly
cited was the impaired credit channel due to
a weak banking system after the crisis of the
late 1990s and corporate deleveraging.
C. Recent Experience in Japan and Elsewhere with Quantitative and Monetary Easing
6.
More recently, advanced countries�� experience with quantitative easing suggests
that central bank purchases have been effective in boosting economic activity and
avoiding deflation. Focusing on the Fed��s asset purchase program, Chung and others (2011)
found that, based on the FRB/US model, the Federal Reserve��s holdings of securities since
late 2008 lowered the unemployment rate by 1½ percentage points. In addition, they found
evidence that the asset purchases helped avert deflation. Liu and Mumtaz (2011) used a
change-point VAR model and found that the Fed��s asset purchase program reduced 10-year
spreads by an average of 90 basis points over the crisis period. Without the spread shock (a
proxy for the asset purchase program), the unemployment rate was estimated to be
0.7 percentage points higher and inflation, on average, 1 percentage point lower in 2010.
7.
Facing persistent deflation and a policy rate at the lower bound, in 2009 the
Bank of Japan expanded its policy toolkit in response to the global financial crisis. The
toolkit included outright purchases of corporate bonds and commercial papers, expansion of
outright purchases of JGBs, fixed rate fund supplying operations, and a fund provisioning
measure to support growth. While these measures helped weather the impact of the financial
crisis, the recovery began to slow during the autumn of 2010, prompting the BoJ to embark
2 The BOJ also purchased limited amounts of asset-backed securities between 2003 and 2006 to support the
development of the asset-backed securities market.
0
5
10
15
20
25
30
35
40
45
0
5
10
15
20
25
30
35
40
45
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Current Account Balance at Bank of Japan
(In trillions of yen)
Sources: Haver Analytics.
ZIRP
QEP
CME
28
-200
-150
-100
-50
0
50
100
150
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
JGBs + T-bills
Fund-supplying operations
Other assets ( incl. CPs, CBs,
ABS, ETFs, JREITs & equities)
Bank notes
Current deposits
Others
Bills sold
Liabilities and net assets
Assets
Source: BoJ and Haver Analytics.
Bank of Japan's Balance Sheet
(In trillions of yen)
on a new CME policy in October 2010. The CME comprised of three elements: (i) a
��virtually zero interest rate�� policy, (ii) a commitment to maintain zero interest rates until it
judges that price stability is in sight on the basis of its ��medium- to long-term understanding
of price stability,��3 and (iii) a new asset purchase program, covering corporate bonds,
commercial paper, exchange-traded funds (ETFs), and real estate investment trusts (REITs),
in addition to government securities, in an effort to reduce term and risk premia. Following
the earthquake, the BoJ doubled the size of the asset purchase program to ¥10 trillion. As a
result, the BoJ��s balance sheet, which was already large at about 20 percent of GDP,
expanded to about 30 percent of GDP.
8.
BoJ��s easing measures could
potentially stimulate economic activity and
lift inflation through various channels. First,
the commitment to a virtually zero interest
rate policy could lengthen expectations about
the duration of an accommodative monetary
policy stance, and therefore reduce long-term
real interest rates and help anchor inflation
expectations. Second, the asset purchase
program could reduce the term and risk
premia and lower a broad array of long-term
interest rates through portfolio rebalancing effect. The purchases could also serve as a
��catalyst�� to raise investors�� appetite for risky assets, thereby easing broader financing
conditions. Finally, direct purchases could generate wealth effects through higher asset prices.
9.
Analysis of the BoJ��s more recent policy actions shows a statistically significant
impact on asset prices. Lam (2011) uses an event study approach to analyze the impact of
the recent monetary policy actions and finds that the cumulative announcement effect of the
BoJ��s monetary easing on various financial market indicators was statistically significant. In
particular, sovereign yields declined across maturities, and corporate yields cumulatively
decreased by about 20 basis points in the two-day window following easing events. Similarly,
the stock market improved in four out of five easing events, cumulatively increasing by
5–7 percent.
10.
The Bank of Japan��s monetary policy actions also appear to have had some
impact on economic activity, particularly during the latter half of the 2000s. Baumeister
and Benati (2010), using a Bayesian time-varying parameter structural VAR, found that long-
term yield spreads—proxies for monetary policy actions under certain identifying
3 The BoJ��s Policy Board members�� ��understanding of medium- to long-term price stability�� is for year-on-year
change in the CPI ��to fall in a positive range of 2 percent or lower, centering around 1 percent.�� The BoJ uses
the annual headline inflation rate as the primary policy consideration and the policy commitment is conditional
on the absence of risk factors, such as financial imbalances, under the BoJ��s second perspective.
29
assumptions—have affected output and inflation for Japan, the United States, the Euro Area,
and the United Kingdom. For Japan, the impact appears to have moderated during the 1990s
and the early 2000s and picked up again during the late 2000s.
11.
This paper contributes to this recent set of literature by adopting a broader
measure of quantitative and monetary easing measures and expanding the sample
period to include more recent BoJ actions. The recent literature uses mainly spreads under
certain assumptions to identify the quantitative easing policies. This paper takes a broader
view and directly includes monetary easing measures in the regressions without imposing
any specific transmission channel to trace their impact on economic activity. At the same
time, it extends the period analyzed to 2010, covering the policy measures taken after the
Lehman collapse.
D. Data and Estimations
12.
Recent studies measuring the effectiveness of asset purchase programs extend
the standard monetary VARs by using spreads as a proxy for quantitative easing. These
papers rely on four sets of variables: i) an economic activity variable, usually growth or
unemployment rate; ii) inflation; iii) policy interest rate; and iv) government bond spread
over the policy rate. As central bank purchases of government bonds reduce spreads, shocks
to spreads are used as proxies for monetary policy intervention. Some papers extend this
basic VAR by including various other variables such as stock prices (Liu and Mumtaz, 2011).
13.
For Japan, this paper extends this basic VAR by explicitly using the BoJ��s
monetary easing measures during 1998-2010 and the nominal exchange rate. This period
covers three distinctive episodes of BoJ��s monetary policy: i) the quantitative easing period
between 2001 and 2006; ii) post-Lehman policy measures, including JGB and CP purchases
and fund supplying operations; and iii) the CME. While policy instruments differ in each
period, they all affect the current account balance at the BoJ through changes in liquidity.
The regressions trace the impact of monetary easing measures on economic activity directly,
and therefore, shocks to spreads are not interpreted as monetary policy actions.4
14.
To assess the impact of monetary easing on activity, we use the following set of
variables in the VARs.
•
Economic activity: real GDP growth rate, unemployment rate, industrial production,
and investment.
•
Inflation: annual core inflation excluding fresh food, and core-core inflation
excluding food and energy.
4 While the period covers the introduction of the CME, the impact on economic activity may not be fully picked
up by the regressions due to monetary policy transmission lags.
30
•
Policy rate: uncollateralized overnight call rate.
•
Term spread: 5-year and 10-year JGB spreads over the call rate.
•
Nominal exchange rate: yen-dollar rate and the nominal effective exchange rate.
•
Monetary policy measures: Current account balances at the BoJ (actual amount and in
percent of GDP); BoJ��s government bond holdings – with maturities shorter than 1
year; with maturities longer than 1 year; total government securities as a share of
JGBs outstanding and also in percent of GDP; and the size of the BoJ��s balance sheet
in percent of GDP.
15.
The exogenous control variables include: a trend term to account for any omitted
variables; GDP of trading partners to account for external shocks; corporate debt to equity
ratio as a measure of leverage in the corporate sector; banks�� non-performing loan ratio to
measure banking sector soundness; and a dummy for the crisis period.
E. Impact of Quantitative and Monetary Easing on Activity
16.
While the monetary easing measures appear to have had a positive but modest
effect on economic activity, the effect on inflation is found to be weaker. Some of the
selected impulse responses are presented below.
17.
Regressions using the real GDP growth rate show that quantitative and
monetary easing measures affected both activity and inflation. In particular, current
account balances at the BoJ as a share of GDP have a statistically significant impact on both
growth and core inflation. The peak occurs after three quarters. 5 The magnitude of the
impact, however, given the size of the shock is relatively small. For example, when current
account balances increase by about 2 percentage points of GDP (about ¥10 trillion), the
growth rate increases by less than a ½ percentage point and core inflation by about
0.1 percentage points at the peak (Figure III.1).
5 One standard deviation of the current account balances at the BoJ is about 2.1 percent of GDP (with a mean of
3.7 percent of GDP). The last data point in the last quarter of 2010 stands at about 4.7 percent of GDP.
31
Figure III.1. VAR with Growth and Current Account Balance at the BoJ; Full Sample
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1
2
3
4
5
6
7
8
9
10
Response of Growth to Generalized One S.D. Innovation
to Current Account Balance (+/- 2 S.D) 1/
1/ S.D. stands for standard deviation.
Source: IMF staff estimates.
18.
This relationship, however, disappears when regressions are restricted to the
earlier period of quantitative easing. For example, when the sample period is curtailed to
end in 2007, no significant impact on economic activity is detected. This is in line with
earlier findings, suggesting perhaps that monetary policy transmission mechanism was not
working as effectively during early-2000s (Figure III.2).6
Figure III.2. VAR with Growth and Current Account Balance at the BoJ; QEP Period
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1
2
3
4
5
6
7
8
9
10
Response of Growth to Generalized One S.D. Innovation
to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
19.
Including the crisis dummy in the VAR does not change the main results. To
check whether the results were driven by the crisis period, a crisis dummy is included in the
sample. The qualitative results and the size of the impact remain the same, with only the
statistical significance of core inflation declining, suggesting that the crisis period is not
driving the results and that the transmission mechanism of monetary policy may have
improved during the second half of 2000s (Figure III.3).
6 As this period is relatively short, the results were also checked using a period covering earlier years.
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
1
2
3
4
5
6
7
8
9
10
Response of Core CPI to Generalized One S.D. Innovation
to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-0.2
-0.1
0
0.1
0.2
0.3
0.4
1
2
3
4
5
6
7
8
9
10
Response of Core CPI to Generalized One S.D. Innovation
to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
32
Figure III.3. VAR with Growth and Current Account Balance at the BoJ; with Crisis Dummy
20.
Buying JGBs rather than T-bills appears to have a larger impact. Focusing on
how the current account balances increased, we find that JGB purchases rather than T-bills
were more effective in spurring activity. In particular, increases in the BoJ's holdings of
government bonds as share of bonds outstanding JGBs appear to stimulate growth,
suggesting that the portfolio balance channel may now be operating. 7 The magnitude of the
impact is again modest, with an increase of about 5 percentage points in the BoJ��s holdings
of JGBs stimulating growth by about a ½ percentage point.
21.
Regressions using industrial production yield similar results. Industrial
production increases moderately in response to the BoJ��s monetary easing, peaking after 3
quarters (Figure III.4). The economic impact
is again moderate, with a 2 percent of GDP
increase in current account balances pulling
up industrial production by about
2 percentage points. Similarly, an increase of
about 5 percentage points in the BoJ��s
holdings of JGBs stimulates industrial
production less than 2 percentage points.
While the qualitative results for inflation are
similar, they are not statistically significant.
7 The sample only covers 2002-2010. One standard deviation of the BoJ��s holdings of JGBs as a share of
outstanding JGBs is about 4.6 percent and the mean is 17 percent.
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
1
2
3
4
5
6
7
8
9
10
Response of Growth to Generalized One S.D. Innovation
to JGB purchases (+/- 2 S.D)
Source: IMF staff estimates.
-0.1
-0.05
0
0.05
0.1
0.15
0.2
-0.1
-0.05
0
0.05
0.1
0.15
0.2
1
2
3
4
5
6
7
8
9
10
Response of Core CPI to Generalized One S.D. Innovation
to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1
2
3
4
5
6
7
8
9
10
Response of Growth to Generalized One S.D. Innovation
to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
33
Figure III.4. VAR with Industrial Production and the BoJ��s Monetary
Policy Actions, with Crisis Dummy
22.
A third set of VARs, using unemployment and investment as economic activity
indicators, yields similar results. Unemployment declines and investment increases in
response to the BoJ��s monetary easing. The magnitude of the impact is again relatively small.
An increase in current account balances of about 2 percentage points of GDP reduces
unemployment by less than 0.1 percentage points and stimulates investment by slightly more
than 2 percentage points (Figure III. 5).
Figure III.5. VARs with Unemployment and Investment
-4
-3
-2
-1
0
1
2
3
4
5
-4
-3
-2
-1
0
1
2
3
4
5
1
2
3
4
5
6
7
8
9
10
Response of Change in Investment to Generalized One
S.D. Innovation to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
23.
Quantitative and monetary easing appears to have no impact on the exchange
rate. This result is also consistent with recent studies. For example, Lam (2011) also finds
that the announcement of the CME policy did not have an impact on the exchange rate either.
The exchange rate appears to be driven mainly by external factors, particularly by interest
differentials and risk appetite.
-0.12
-0.1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
-0.12
-0.1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
1
2
3
4
5
6
7
8
9
10
Response of Unemployment to Generalized One S.D.
Innovation to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
-10
-8
-6
-4
-2
0
2
4
6
8
10
-10
-8
-6
-4
-2
0
2
4
6
8
10
1
2
3
4
5
6
7
8
9
10
Response of Industrial Production to Generalized One
S.D. Innovation to JGB Purchases (+/- 2 S.D)
Source: IMF staff estimates.
-5
-4
-3
-2
-1
0
1
2
3
4
5
-5
-4
-3
-2
-1
0
1
2
3
4
5
1
2
3
4
5
6
7
8
9
10
Response of Industrial Production to Generalized One
S.D. Innovation to Current Account Balance (+/- 2 S.D)
Source: IMF staff estimates.
34
24.
Improved banking sector health and
completion of corporate sector
deleveraging may have improved the
monetary transmission channel after 2006.
Non-performing loans declined from
8.4 percent in 2002 to 2.5 percent by 2007
and have remained low since. In addition, the
corporate sector reduced its debt-to-equity
ratio from about 200 percent to less than 100
percent over the same period. Both of these
factors may have helped restore the credit
channel and demand for funds over the period. To test this hypothesis, both variables are
included in the regressions as exogenous variables. While they are correctly signed, they are
not statistically significant for all regressions. Industrial production in particular, appears to
react positively—and in a statistically significant way— to corporate sector deleveraging.
F. Conclusions
25.
To summarize the results, the paper finds that recent monetary easing by the
BoJ have been effective in lifting economic activity. Using various measures for economic
activity, ranging from growth to investment, the VAR regressions pick up a statistically
significant but moderate impact on economic activity. The difference compared to the earlier
studies may be due to improved monetary policy transmission mechanism as a result of
deleveraging in the corporate sector and improvements in the banking sector. When the
regressions were run just for the period of 1999–2007, quantitative easing does not appear to
affect economic activity.
26.
The impact of quantitative and monetary easing on inflation, however, is weaker,
though in the right direction. This might reflect Japan��s relatively flat Phillips curve, which
requires large changes in output to move inflation. Similarly, Lam (2011) finds that recent
monetary easing measures had no statistically significant impact on inflation expectations.
Given that quantitative easing has had only a modest impact on economic activity, its impact
on inflation may not yet be detectable.
27.
BoJ��s monetary policy measures have had no impact on the exchange rate.
Therefore, any impact on economic activity is likely to work through other channels such as
portfolio rebalancing or policy commitment rather than the exchange rate.
28.
While it is too early to assess the impact of the CME introduced last October, the
results suggest that the BoJ��s policy actions could help stimulate economic activity. The
paper has mainly focused on current account balances and JGB purchases, which work
primarily through reducing spreads and term premia. The CME policy, on the other hand,
also includes purchases risky assets, targeting risk premia directly. While it is still too early
0
0.5
1
1.5
2
0
1
2
3
4
5
6
7
8
9
Mar-99 Sep-00 Mar-02 Sep-03 Mar-05 Sep-06 Mar-08 Sep-09
All Banks: Nonperforming-loans ratio
Corporate debt-to-equity ratio (RHS)
Corporate Sector Deleveraging and Banking Sector
Health (In percent)
Sources: Haver Analytics.
35
to assess the economic impact of such purchases, their impact on asset prices may also be
promising. In particular, private asset purchases can complement traditional channels by
reducing further the term and risk premia, support asset prices, and therefore stimulate
investment and consumption. Future research is likely to shed light on the impact of the CME
when more data become available. Different identification methods could also help detect the
causality running from various easing measures to economic activity and inflation.
29.
The BoJ could help support economic activity and guard against the risk of
deflation by further easing measures, particularly given the history of very low and
negative core inflation and the risks going forward of persistent deflation. These results
offer some encouragement that the BoJ��s recent easing measures could support the recovery
and help achieve their objective of price stability.
36
References
Baumeister, C. and Benati, L., 2011, ��Unconventional Monetary Policy and the Great
Recession��, ECB Working Paper Series, No 1258, October 2010.
Chung, H. and others, 2011, ��Have we Underestimated the Likelihood and Severity of Zero
Lower Bound Events?,�� Federal Reserve Bank of San Francisco, Working Paper
Series, No 2011-01.
Lam, W.R., 2011, ��Bank of Japan��s Monetary Easing Measures: Are They Powerful and
Comprehensive?,�� Japan 2011 Article IV Consultation, Selected Issues Paper,
Chapter II.
Liu, P, and Mumtaz, H., 2011, ��Changing Macroeconomic Dynamics at the Zero Lower
Bound,�� forthcoming IMF Working Paper.
Ugai, H., 2007, ��Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses��,
Monetary and Economic Studies, March.
37
75
100
125
150
175
200
225
75
100
125
150
175
200
225
-12-10 -8 -6 -4 -2 0
2
4
6
8 10 12 14 16 18 20 22
Earthquake
Hyogo
Tohoku
Unemployment Insurance Recipients
(Index Occurence month=100)
Source: MHLW.
0
20
40
60
80
100
120
140
0
50
100
150
200
250
300
350
400
450
500
0
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30 32 34
Billio
n
Ye
n
Months
Bankruptcy after Kobe Earthquake
Bankruptcy after East Japan Earthquake
Debt amount after Kobe Earthquake (RHS)
Debt amount after East Japan Earthquake (RHS)
Bankruptcy Related to Kobe and East Japan Earthquake
Source: Teikoku Databank, Ltd.
IV. LABOR POLICIES TO BOOST EMPLOYMENT AFTER THE EARTHQUAKE1
A. Introduction
1.
The Great East Japan earthquake
has had a significant impact on labor
markets in the region. Early statistics
suggest that the shock is substantially larger
than the Great Hanshin earthquake in 1995,
with the number of applications for
employment insurance rising sharply in the
first few months. The Ministry of Health,
Labor and Welfare (MHLW) estimates that
nearly 841 thousand workers (1 to 2 percent
of the national workforce) and 88 thousand
establishments (mostly SMEs) were located in the directly affected region.
2.
But the disaster also had a
nationwide impact. Shortages of key inputs,
including electricity, and the ongoing nuclear
accident affected businesses and workers
across industries and outside the northeastern
regions. This resulted in a sharp rise in
applications for the employment assistance
subsidy across the country (which more than
doubled to approximately 2.25 percent of the
national labor force through April) and a
sharp rise in national bankruptcies related to
the earthquake. While the unemployment rate has recently been stable, delays in hiring and
business restructuring could dampen labor markets going forward.
3.
The new labor market challenges add to the broader need for Japan to raise its
growth potential. Since the 1990s, trend growth has been weakening due to a shrinking
labor force, which is estimated to deduct approximately ½ percentage points from annual
potential GDP growth this decade (Shirakawa 2010). At the same time, the Japanese
economy will need to generate sufficient growth momentum to finance fiscal reforms, to
meet the demands of an aging population, and to take full advantage of growth opportunities
in a rapidly changing regional economic landscape. The earthquake has not only made a
commitment to such enabling reforms more urgent—as businesses and households assess
their options for reconstruction and relocation—but also provides an opportunity to
1 Prepared by Chad Steinberg.
38
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09
Japan
United States
Germany
Italy
Recipients of Job Subsidies through the Crisis
(In percent of Labor Force)
Source: WEO.
accelerate reforms. An important element of the government��s new growth strategy should be
policies to increase employment opportunities for women, the young, and the old.
4.
This note discusses how labor policies can support employment in the aftermath
of the earthquake and boost growth over the medium term. The first part of this note
discusses near-term challenges to support employment and protect incomes, while the second
part of the note discusses medium- to long-term policies that can help restore the economy��s
growth potential by boosting overall employment.
B. Supporting Near-Term Employment
5.
The authorities have been quick to provide temporary assistance to firms and
workers in the affected region while supporting employment nationwide. Using pre-
existing support systems, the government provided employment adjustment subsidies to
firms to help maintain employment levels and relaxed eligibility criteria for unemployment
insurance.
Employment Support
6.
The Employment Adjustment
Subsidy program has shown to be an
effective tool to help maintain employment
during periods of crisis. This short-term
work scheme was first developed during the
oil shocks in the 1970s, and during the recent
financial crisis, covered at its peak nearly
3.8 percent of the labor force, the largest share
amongst industrialized countries. The main
recipients were firms in the manufacturing
sector and SMEs, with both categories
accounting for approximately eighty percent of the subsidy in FY2008–09. The size of the
program also far exceeded its utilization in the past.
7.
To meet potential demand for employment support in the disaster region, the
government has eased eligibility criteria. The eligibility criterion on sales was changed
from a quarterly to a monthly assessment, such that firms could immediately qualify;
subsidies were extended for an additional 300 days regardless of previous usage; and
coverage was extended to firms outside of the region that were affected by either shortages in
electricity or in critical part supplies. As the subsidy is time bound, it will be phased out as
the economy recovers. Through April, uptake has been significant with the share of the labor
force covered rising from 1 to 5 percent in the Tohoku region, and from 1 to 2.25 percent
nationwide. During Kobe, peak coverage in the Hyogo prefecture was approximately
3 percent.
39
8.
Reintegrating the unemployed may require further measures that aid with job
transition. Because of existing labor market rigidities and a focus on lifetime employment
contracts in Japan, changing career paths is more difficult than elsewhere, with Japan having
a relatively high share of long-term unemployed in total unemployment (Figure IV.1). Older
and low-skilled workers are likely to have greater difficulties in finding new employment as
experienced after the Kobe earthquake. During the recovery, the job-to-application ratio
improved steadily for workers under the age of 45 from 0.65 to 0.97 over a span of two years,
but remained broadly unchanged between 0.21 and 0.27 for workers over the age of 45. To
help workers reintegrate, the government could consider:
•
Job search and relocation assistance: Local Hello Work offices are now actively
advertizing jobs outside of the region and are providing monetary assistance for
relocation. The experience from Kobe also suggests that job fairs can be particularly
effective. The government could also consider providing residents with direct cash
grants that could be used for relocation, with Glaeser (2005) recommending a similar
program for the victims of Hurricane Katrina in the United States.
•
Employment subsidies. Employers could be given incentives to hire and train low-wage
workers. Phelps (2010) has recently argued for a program of tax credits for companies
employing low-wage workers in the United States and a work opportunity tax credit
was used following Katrina. In Kobe, the government implemented an employment
subsidy specifically for the hiring of workers between the ages of 45 and 55.
•
Job training. The government could provide targeted training in new growth sectors,
such as medical and child care services.
Figure IV.1. Barriers to Labor Force Reentry
0
10
20
30
40
50
60
0
10
20
30
40
50
60
KOR
USA
GBR
JPN
FRA
DEU
Share of Long-term Unemployment
(In percent of total unemployment, 2000-07 Average)
Source: OECD.
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.4
0.45
0.5
0.55
0.6
0.65
0.7
20��24 25��29 30��34 35��39 40��44 45��49 50��54 55��59 60��64
Average
Job-to-Applicant Ratio by Age Group
(Dec. 2010-Feb. 2011)
Source: MHLW.
Unemployment Insurance
9.
The unemployment insurance system in Japan is broadly similar to that in other
OECD countries (Table IV.1). The system allows for coverage of workers that have worked
for at least the last month at a job that requires a minimum of 20 hours a week. The period of
40
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
1985
1988
1991
1994
1997
2000
2003
2006
2009
%
o
f T
o
ta
l E
m
ployees
Part-time worker
Arbeit
Dispatched worker
Contract employee
Other
Source: MIAC Labor Force Survey.
1/ Not include Iwate, Miyagi, and Fukushima in 2010.
Trend in Non-regular Workers
(In percent)
unemployment insurance is between 3 to 12 months with the actual period determined by the
length of employment and the age of the worker. In this crisis, the government has further
relaxed eligibility requirements by expanding coverage to workers that were not fired but
were left temporarily unemployed by the circumstances, and expanded the standard payment
period by four months.
Table IV.1: Unemployment Insurance Schemes
JPN
USA
GBR
DEU
FRA
Coverage
50-80% of the
previous wages
50% of the
previous wages
GBP65.45 per
week
67% of the
previous wages
57.4-75% of the
previous wages
Duration
3-12 months
0-6 months
0-6 months
3-24 months
4-36 months
Source: The Japan Institute for Labor Policy and Training
10.
The growing numbers of non-
regular workers, however, remain at risk
of not being properly registered under
social security due to non-compliance of
firms with social security payment
obligations. To assess eligibility for
unemployment insurance, officials rely on
official business records of their wage bill. To
ensure that these records are accurate, the
authorities need to be able to compare the
wage bill an employer declares when
calculating corporate or entrepreneurial taxable income with the wage bill on which social
insurance contributions have been paid (OECD 2011). The administration has reportedly
been tolerant of companies that evade payments for social insurance premiums, with few
criminal indictments against firms evading payments, which may have encouraged lax
compliance (Duell, Grubb, and Singh, 2010). Unifying the collection of taxes and social
insurance contributions would be one way of improving compliance (OECD 2011).
Reviving Labor Markets in the Tohoku Region
11.
Tohoku has fewer economic opportunities than elsewhere in Japan. With Japan
being one of the most geographically concentrated countries in terms of both population and
GDP, a few city centers—Tokyo, Nagoya, and Osaka— account for nearly one-third of
output. The regional economies, in contrast, are on average older, more agrarian, and less
educated, with average incomes about one-quarter less than those in the major cities
(Table IV.2).
41
Table IV.2 Selected Economic Indicators for the Tohoku Region
Iwate Miyagi Fukushima Tokyo Japan
Unemployment rate, 2001-2005 Average (%)
4.9
5.7
5.0
5.1
5.0
Prefectural income per capita, 2008
(1,000 yen)
2,267
2,473
2,743
4,155
2,916
Household with annual income less than
2 million yen, 2009 (%)
7.1
5.8
3.9
2.9
4.4
Share of agricultural workers, 2005 (%)
13.7
6.2
9.2
0.4
4.8
Share of population with tertiary education, 2000 (%)
16.9
22.0
17.0
38.8
26.8
Share of elderly citizens, 2009 (%)
26.8
22.1
24.7
20.9
22.7
12.
A swift recovery of labor markets in the local economy is thus uncertain.
Historical evidence and the experience of Kobe suggest that under certain circumstances a
rapid recovery is possible; but, economic characteristics in Tohoku resemble those in New
Orleans, which had a less successful recovery following Hurricane Katrina (Box IV.1). The
possibility of outward migration by skilled and young workers could complicate the region��s
revitalization.
C. Boosting Overall Employment
13.
Japan is growing older faster than
anywhere else in the world. After
experiencing a demographic dividend of a
rapidly growing labor force and falling birth
rate in the 1960s to 1980s, Japan is now
facing the consequences of a rapidly aging
society and a sharp decline in the size of its
labor force. The working-age population, aged
15-64, will fall from its peak of 87 million in
1995 to about 52 million in 2050. This is
approximately the same size as the workforce
at the end of the Second World War (Economist 2010). Unless output per worker rises at a
faster rate to offset the decline in the number of workers, Japan��s GDP is likely to fall behind
comparator countries. Yet there is much Japan can still do to help mitigate the decline in the
size of its workforce apart from encouraging immigration, particularly by tapping
underutilized sources of labor, such as women, the young, and the old.
Youth Employment: A New Labor Contract for New Graduates2
14.
The most important individual labor market decision in Japan is typically made
following graduation from post-secondary school, with considerable focus on the
2 Youth unemployment in Japan at around 11 percent is more than double the national average. But with a
relatively low unemployment rate overall and a highly educated labor force, this figure is much lower than
youth unemployment rates in other advanced economies.
50
100
150
200
250
50
100
150
200
250
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Forecast
FRA
DEU
JPN
GBR
USA
Working-age Population Change, 1950-2050
(Index, 1950=100)
Source: U.N.
42
0
5
10
15
20
25
30
0
5
10
15
20
25
30
15-24
25-34
35-44
45-54
55-64
Share of Male Non-regular Workers by Age Group, 2010
(In percent)
Source: MIC.
attainment of jobs with an implicit lifetime employment guarantee. As a result, most
employees do not expect to reenter the labor market during their prime working years. It is
decisions made at this juncture that often lead to the many inequities that exist in the current
employment system, including both the high level of non-regular workers amongst the young,
and the minimal number of career female employees.
15.
For example, the structural decline
in the number of available lifetime
employment contracts has led to a growing
share of young workers in non-regular
positions. Following the collapse of Japan��s
asset price bubble, firms began to hire a more
flexible labor force that could adjust to
changes in demand and rising uncertainty
about the future (Asano, Ito, and Kawaguchi
2011). They achieved this through worker
attrition by hiring fewer new graduates and
offering voluntary retirement packages to their oldest employees. As a result, non-regular
employment is now heavily concentrated in the generation of workers that first entered the
labor market after the bursting of the bubble and in the oldest cohort.
16.
Reforming this market is key to creating a more flexible and equal labor market
overall. Introducing a new, more flexible labor contract could increase incentives for hiring
regular workers and allow a greater number of young and female workers to enter
mainstream career paths with established firms. One possible option is to modify regular
work contracts to include phased-in employment protection. Such a new regular work
contract would gradually increase the dismissal costs to employers over the course of a
worker��s tenure. This would help reduce hiring risks given unknown skills of new workers
(or more importantly, the length of their tenure), while maintaining employment protection
for tenured employees.
Female Employment: Support for Working Mothers
17.
Female labor participation (FLP)
rates are low compared to other advanced
economies, with the difference between
male and female participation rates nearly
25 percent. At the same time, young women
in Japan are more educated than both their
OECD peers and their male counterparts, with
women in their 20s having on average
14.3 years of schooling. Thus, getting more
women into the workforce would not only
28.5
25.0
14.1
13.1
12.2
5.7
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
Korea
Japan
U.S.
U.K.
Germany
Sweden
Difference in Prime-age Male and Female Labor
Participation Rate, 2009 (In percent)
Source: OECD, and Fund staff calculations.
43
increase the size of the labor force but also possibly increase its skill intensity. We estimate
that if Japan was to raise its FLP ratio to the level of the G-7 average, per capita GDP would
be approximately 5 percent higher, raising potential GDP growth by as much as a quarter of a
percentage point during the twenty year transition period.3
18.
One obstacle to higher FLP rates is the high drop-out rate of women from the
labor force following child birth (Figure IV.2). FLP rates for women in their early twenties
are similar to comparator countries but then fall off sharply. This reflects both weak support
systems for working mothers and the reluctance of firms to hire career female employees at
the start of their careers.4 When women reenter the labor market, they often choose lower-
paying non-regular positions5, and as a result, Japan stands out in cross-country comparisons
of the share of female managers.
Figure IV.2. Challenges for Female Labor Participation
19.
Providing support for working
mothers may help reduce this disparity in
female labor participation and assist more
female employees to become future
managers. Previous studies have found that
FLP is positively associated with a more
neutral tax treatment of second earners,
childcare subsidies, and paid maternity leave
(Jaumotte 2003); and according to OECD
statistics, Japan provides much fewer of these
benefits. Public expenditure on childcare and
3 This calculation assumes that the FLP rate rises from 62 percent in 2010 to 70 percent in 2030.
4 Despite efforts by the government to reduce gender discrimination—through the passage of two separate equal
employment acts in 1986 and 1999—hiring practices by firms continue to be targeted towards male employees.
5 This also reflects a tax system that is biased towards part-time work.
20
30
40
50
60
70
80
90
100
20
30
40
50
60
70
80
90
100
20 to
24
25 to
29
30 to
34
35 to
39
40 to
44
45 to
49
50 to
54
55 to
59
60 to
64
DEU
JPN
DNK
USA
Female Labor Participation Rate by Age Group, 2009
(In percent)
Source: OECD.
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
USA
FRA
DEU
GBR
CHN
JPN
KOR
Female Manager Share, 2009
(In percent)
Source: UNDP.
0.6
0.4
0.1
0.1
0.2
0.1
0.4
0.2
0.3
0.3
0.1
0.1
0
0.2
0.4
0.6
0.8
1
1.2
0
0.2
0.4
0.6
0.8
1
1.2
Sweden
U.K.
Germany
U.S.
Japan
Korea
Pre-primary spending
Childcare spending
Public Expenditure on Child Support, 2005
(In percent of GDP)
Source: OECD.
44
early educational services is in the bottom one-quarter of the distribution, and informal
reports within Japan suggest that demand largely outstrips supply, with potential unmet
demand as high as one-third of current childcare capacity.
Elderly Employment: Raising the Retirement Age
20.
Across the OECD life expectancy has risen faster than the average retirement
age. In Japan, the OECD country with the highest life expectancy at 82.6 years, a mandatory
retirement age of 60—relative to the OECD average of 64.4 years— is incongruous. A recent
law that encourages firms to rehire productive workers on non-regular contracts between the
ages of 60 and 64 has helped lift employment rates for workers in this age group from
53 percent in 2006 to 57 percent in 2010. Despite this rise, however, employment rates still
fall significantly with age, from 75 percent of the 55-to-59 group in 2010 to 57 percent of the
60-to-64 group and 36 percent of the 65-to-69 group (OECD 2011).6
21.
Increasing the average retirement age would help increase labor participation
and help reduce pressure on pension systems. But achieving this under the current lifetime
employment system may create inequities for the younger generations, with many firms
currently using the early retirement age as a means to reduce the number of workers. Thus, to
achieve greater labor participation of the elderly by raising the retirement age requires also a
change to the current lifetime employment system to one that places greater weight on
performance and flexibility.
D. Conclusions
22.
The earthquake has had an important impact on labor markets at the national
level. In the near term, policies to support employment and protect incomes appear to have
been effective, but will need to be phased out as the economy gains strength and
complemented with training and job search assistance programs to facilitate a smooth
reallocation of labor.
23.
The earthquake provides, however, also an opportunity to accelerate reforms to
raise growth. Policies to increase employment by tapping underutilized sources of labor will
be increasingly important to help decelerate the speed at which Japan��s labor force declines.
Moreover, reforms to Japan��s lifetime employment system are needed to help reduce current
hiring inefficiencies for the young and old, and to reduce growing inequities between regular
and non-regular workers.
6 In addition to the retirement age, the sharp drop-off in wages (30-40 percent) after age 60 discourages labor
force participation.
45
25
30
35
40
25
30
35
40
FRA
DEU
JPN
GBR
USA
OECD avg.
Mid-1980s
Mid-1990s
Mid-2000
OECD average
(in 2005)
Gini Coefficients of Income Inequality: 5 OECD Countries
Source: OECD Factbook 2010.
Box IV.1. What are the Prospects for a Recovery in the Tohoku Region?
Historical evidence suggests that cities tend to rebound rapidly from disasters (Vigdor 2008, Davis and Weinstein
2002). In the case of the Great Hanshin earthquake in 1995, the city of Kobe recovered quickly with most of its industrial
sector remaining intact1, including the ��chemical shoes�� industry. This low value added industry—with heavy competition
from China—was destroyed by fires following the quake, but contrary to expectations at the time recovered within a few
years. The resilience of cities in part relates to the benefits of agglomeration derived from a large pool of diverse skilled labor,
while the destruction of physical capital can be of secondary importance given that it can be replaced quickly.
The U.S. experience with Hurricane Katrina in 2005 provides a useful benchmark to help draw policy lessons for
Tohoku��s current challenges. Similar to the Tohoku region, New Orleans had been in a slow period of decline prior to the
disaster with its population as a share of U.S. population peaking in the 1800s. Moreover, the hurricane displaced nearly
650,000 people, with some estimates suggesting that all 400,000 of the downtown residents were evacuated. Thus, like
Tohoku, New Orleans faced similar questions about its post-disaster future. Two years after the disaster, an estimated one-
third to one-half of the evacuees had not returned to the city. There was also a significant change in the demographics of the
city, with the composition of residents becoming slightly more economically disadvantaged. Statistics also reveal that most
industries had experienced a fall in employment, with services (for local residents), manufacturing, and transportation
experiencing the largest declines.
Economic differences between Tohoku and the major
city centers suggest that Tohoku may not rebound to its
pre-quake population level, with higher skilled younger
workers possibly choosing to relocate. Since the late
1950s (Figure IV.3), the population in Tohoku (as a share of
Japan��s total population) declined fastest in Japan��s boom
years when income differences were the widest. This trend
continued into this decade and is reflected in the rise in
Japan��s Gini coefficient which captures the growing regional
economic differences between urban centers and rural
regions. Recent emigration from Tohoku has in large part
taken place amongst younger cohorts, with many students
seeking better opportunities in the city centers.
____________________
1 The damage during the Great Hanshin quake is estimated at ¥9.6 trillion relative to ¥16.9 trillion for the Great East Japan
quake. For a discussion of the economic impact on the city of Kobe, see Horwich (2000).
Figure IV.3. Rural-to-Urban Migration
4
4.5
5
5.5
6
10
15
20
25
30
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Coefficient of Variance
Population Share of Tohoku
Prefectural per Capita Income Difference, 1955-2006
(Coefficient of variance, in percent)
Source: CAO.
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
below 20
20��29
30��39
40��49
50��59
above 60
Iwate
Miyagi
Fukushima
Net Migration by Age, 2010
(In percent of total population by age)
Source: MIC.
46
References
Asano, Hirokatsu, Takahiro Ito and Daiji Kawaguchi, 2011, ��Why Has the Fraction of
Contingent Workers Increased? A Case Study of Japan,�� RIETI Discussion Paper
Series 11-E-021.
Davis, Donald R., and David Weinstein, 2002, ��Bones, Bombs, and Break Points: The
Geography of Economic Activity,��
American Economic Review, Vol. 92 (5),
pp. 1269–89.
Duell, Nicola, David Grubb, Shruti Singh and Peter Tergesit, 2010, ��Activation Policies in
Japan,��
OECD Social, Employment and Migration Working Papers, No. 113, OECD,
Paris.
The Economist, 2010, ��On the Down Escalator,�� November 18.
Glaeser, Edward L, 2005, ��Should the Government Rebuild New Orleans, Or Just Give
Residents Checks?�� The Economists�� Voice, 2 (4): Article 4.
Horwich, George, 2000, ��Economic Lessons of the Kobe Earthquake,��
Economic
Development and Cultural Change, Vol. 48 (3), pp. 521–42.
Jaumotte, Florence, 2003, ��Female Labour Force Participation: Past Trends and Main
Determinant in OECD Countries,��
OECD Economics Department Working Papers,
No. 376, OECD Publishing.
OECD, 2011, Economic Survey of Japan.
Shirakawa, Masaaki, 2010, ��Japan��s Economy and Monetary Policy,��
Speech at a Meeting
with Business Leaders in Nagoya.
Phelps, Edmund, 2010, ��The Economy Needs a Bit of Ingenuity,��
New York Times, August 6.
Vigdor, Jacob, 2008, ��The Economic Aftermath of Hurricane Katrina.�� Journal of Economic
Perspectives, 22(4): pp. 135–54.
