sent 23 February 2001
BOJ must act to fight deflation," Financial Times, 19
Quantitative easing is simply a 'bank tax'
The Group of Seven's call for monetary easing to solve Japan's economic
problems seems to misunderstand bank mechanics. I suspect that most who
advocate quantitative easing do not recognise that it is but a "bank tax".
The purchase of securities by the Bank of Japan reduces private sector
holdings of Japanese government bonds and increases member bank reserve
account balances at the BOJ. As reserve accounts do not earn interest, banks
are left holding a higher percentage of their capital in these
non-interest-bearing BOJ accounts.
Quantitative easing would reduce the interbank rate in Japan from 0.25 per
cent back to 0 per cent. But, since lending is not reserve constrained,
loans would increase only to the extent that lower interest rates would
attract additional borrowers. Recent experience shows that to be negligible.
Furthermore, since Japan is a large net payer of interest on its public
debt, cutting rates reduces government interest payments and therefore
private sector income.
Warren B. Mosler
Principal, AVM LP
250 So Australian Avenue
W Palm Beach, FL 33401, USA
Copyright: The Financial Times Limited