Japan Joins the 'QE' Bandwagon—But Will it Work?

Japan, the U.K., the U.S., and the European Union all have problematic quantitative easing schemes.


Japan's central bank is focusing on short-term assets that will mature quickly.

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If imitation is truly the sincerest form of flattery, then Ben Bernanke and his friends at the Federal Reserve must be blushing at the news that Japan is now pursuing its own version of what some have called "QE Infinity," a seemingly endless policy of monthly bond buys to keep interest rates low. Just as the Fed chose to begin monthly asset purchases late last year, the Bank of Japan has announced that it will buy roughly $145 billion in assets per month. Key goals include counteracting deflation and bolstering a flagging economy, in part by lowering the yen's value and boosting exports. Even with such a sizable plan in place, Japan's new QE policy may not have the firepower of the Federal Reserve's QE plan. Indeed, it looks like no one is quite getting quantitative easing right.

The Bank of Japan's $145 billion per month sounds like an aggressive plan, especially next to the U.S.'s $85 billion in monthly purchases. However, it may not have much as much impact on a dollar-for-dollar (or, rather, yen-for-yen) basis.

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"Just saying you printed X dollars of money or bought X amount of assets doesn't really tell you what you need to know. It matters what you buy—that's the key thing," says Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.

Indeed, though Japan's central bank will be buying a large amount of assets each month, the bank is focusing more on short-term assets, which will mature quickly and move off of the bank's balance sheet. That means a less powerful economic boost, says Gagnon.

"The more risky the asset you buy, that makes more effect on the market, on the economy," he says. "They're just printing money and buying short-term government bonds, which everyone views as the equivalent of cash."

That runs counter to the U.S.'s monthly purchases. One goal of quantitative easing is to move investors out of longer-term treasuries. When the Fed buys up 10-year treasuries, it drives down the yields on those investments, ideally making the treasuries less attractive and driving investors elsewhere, like the stock market.

Not that Japan's new program is the only flawed approach to quantitative easing out there. Other recent money-printing schemes have their own fundamental flaws, experts say.

Among those are quantitative easing programs at the Bank of England, the Federal Reserve, and at the European Central Bank. Like Japan, all of these central banks have seen their balance sheets bulge in recent years. The Bank of England has roughly quadrupled the assets on its balance sheet, from around 100 billion pounds in early 2008 to around 400 billion currently. The European Central Bank has more than doubled its assets to around 2.9 trillion euros, and the Fed balance sheet has gone from around $900 billion pre-crisis to $2.9 trillion. Critics of easing fear that all of this new money in the system will lead to runaway inflation.

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While easing has perhaps staved off more pain in any of these economies, it is not as effective as it could be, says one expert.

"QE is an important part of the solution, but it can't be the whole solution," says Tu Packard, senior economist at Moody's Analytics. She compares economic stimulus to a pair of scissors. Just as one side of a pair of scissors is relatively ineffectual without the other, monetary stimulus can have a limited effect without fiscal stimulus in the form of higher government spending or lower taxes to boost it.

In fact, this is one way in which Japan's easing program bests its peers, she says. Though Japan's QE program may be flawed in its own way, that country is also undertaking fiscal stimulus, along with monetary stimulus. That fiscal stimulus package includes new infrastructure spending, as well as disaster preparedness and spending on local governments.

Meanwhile, the U.S., U.K., and countries in the European Union have pulled back on new government spending, fearing boosting deficits and creating unsustainable debt levels, says Packard. That makes for an awfully clumsy, one-sided scissor.