Bank of Japan having trouble reversing previous QE..

The Bank of Japan bought shares from banks (shares for cash) in 2002 and 2009/2010 in an attempt to inject liquidity and avert a credit crunch in the economy.  Planned sales of those shares have been put on hold, a sign that central banks in the US and Europe may have difficulty contracting their balance sheets in the years to come.

While Japanese banks’ assets have been increasing, this has largely been to the benefit of securities held as investments rather than loans: that said current loan growth, though very weak, is stronger than that (clearly) seen in the period post 1997/1998 when Japanese banks were forced to accept higher banking standards (watch out the Eurozone banking system).


It remains to be seen what type of profile loan growth is going to take once we iron out post Fukushima distortions amidst a global and domestic deleveraging environment.  One things is discernible though, current loan growth is unlikely to drive the economy forward (0.83% annual loan growth in the year to November 2011) and central bank monetary easing is likely to continue.   It is also worth noting that the recovery in loan growth in the mid 2000s coincided with the explosion of global trade and associated imbalances, factors which are unlikely to be repeated to the same extent in Japan’s favour in the near term.

Note also

Excerpt from report  Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 1018, June 2011, Quantitative Easing and Bank Lending: Evidence from Japan

….the effect of the Bank of Japan’s liquidity injections on bank lending was muted by the substitution of central bank liquidity for interbank liquidity. Second, despite the dampening of the stimulus from the liquidity injections due to this substitution, we find a positive and significant effect of liquidity on bank lending. This suggests some scope for quantitative easing to affect the supply of credit, particularly during periods of financial stress. However, the overall effect was measured to be quite small, so that eye-popping amounts of liquidity would have been needed to achieve noticeable effects. Third, we find some evidence that weak banks benefited more from QEP than stronger banks……

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