Mark Spiegel: Did Quantitative Easing by the Bank of Japan Work?

Mark Thoma sends us to Mark Spiegel on the channels of monetary policy:

Economist's View: FRBSF: Did Quantitative Easing by the Bank of Japan Work?: The San Francisco Fed has an Economic Letter assessing of the Bank of Japan's policy of quantitative easing from 2001 to 2006. Here's the introduction and conclusion to the study:

Did Quantitative Easing by the Bank of Japan "Work"?, by Mark M. Spiegel Vice, FRBSF Economic Letter: On March 19, 2001, the Bank of Japan (BOJ) embarked on an unprecedented monetary policy experiment, commonly referred to as "quantitative easing," in an attempt to stimulate the nation's stagnant economy.

Under this policy, the BOJ increased its target for "current account balances" of commercial banks at the BOJ far in excess of their required reserve levels. This had the expected impact of reducing the already low overnight call rate (which is roughly equivalent to ... the federal funds rate) effectively to zero. In addition, the BOJ committed to maintain the policy until the core consumer price index registered "stably" a 0% or a positive increase year on year. The policy was lifted five years later, in March 2006. At the launch of the program, many were skeptical that it would have any impact on the real economy, as overnight interest rates were already close to zero, so flooding Japanese commercial banks with excess reserves would only amount to a swap of two assets with close to zero yields.

Now that the program has been lifted, several studies have attempted to assess its impact through a number of channels. These include a direct effect of increases in current account balances, an impact on the expectations of market participants, increased central bank purchases of long-term Japanese government bonds (JGBs) that would reduce long-term interest rates, and an encouragement of greater risk-tolerance in the Japanese financial system....

Conclusion: The results ... are just now making their way into the literature, but several patterns already have emerged. First, the primary evidence for the real effects of quantitative easing appears to be associated with ... some measurable declines in longer-term interest rates. These have been associated with both changes in agents' expectations of future interest rate levels and with purchases of "nonstandard" assets, such as longer-term JGBs. As these policies often occurred simultaneously, it is difficult to discriminate between the two. Second, there appears to be evidence that the program aided weaker Japanese banks and generally encouraged greater risk-tolerance in the Japanese financial system.

While these outcomes appear to be consistent with the intentions of the program, the magnitudes of these impacts are still very uncertain. Moreover, in strengthening the performance of the weakest Japanese banks, quantitative easing may have had the undesired impact of delaying structural reform...

The idea that direct injections of liquidity into the economy may work to stimulate spending even without having effects on interest rates is an old one, and one that I have always viewed with skepticism. Somebody's behavior has to be changing in order for spending to go up. And it is hard to see how behavior can change without changing some financial market prices and interest rates somehow, somewhere.