Effects of Japanese quantitative easing policy on the economies of Japan and Korea

Abstract

The Abe administration, launched at the end of 2012, sought to promote economic growth and to raise the inflation rate by means of a combination of three policies: quantitative easing, fiscal expansion, and restructuring. It seems that consensus is being formed on the effect of the stimulus. However, debate continues over to what extent Japan’s quantitative easing (QE) and qualitative and quantitative easing (QQE) have been effective. A major issue is how to define and measure QE or QQE itself. It is not clear whether a monetary-base shock is an appropriate proxy for a change in monetary policy. Moreover, effects of drastic rises in the monetary base during QE and QQE cannot be singled out when the standard constant-parameter models are used. Another issue is whether Japan’s QE and QQE have a beggar-thy-neighbor effect through depreciation of the Japanese yen. This paper analyzes whether announcement-based QE or QQE shocks have statistically significant effects on the Japanese and Korean economies by using a qualitative vector autoregressive (Qual VAR) model. The paper checks the robustness of the empirical findings by using the monetary base as the proxy for quantitative easing policy in a time-varying parameter vector autoregression (TVP VAR) model. The results from Qual VAR and TVP VAR imply that the QE and QQE policies are successful in boosting the CPI of Japan in the long run only during the second QQE period. However, in both approaches, we observe that monetary-easing policy clearly causes the Japanese yen to depreciate. For its effects on Korea, Qual VAR analysis shows that the negative effect of the Japanese easing policy on Korea’s GDP becomes stronger during the QQE period.