The effectiveness of quantitative easing: Evidence from Japan

Abstract

This study contributes to current research on quantitative easing. We provide a novel analysis of the quantitative easing effectiveness as an unconventional monetary policy tool in Japan over the last two decades. The paper advances current research on quantitative easing by exploring quantitative easing through the prism of the monetary transmission mechanism. We examine the response of Japanese Regional Banks to the quantitative easing operations conducted by the Bank of Japan from the early 2000s till 2015. The analysis is performed within the framework of the bank lending channel under the unconventional monetary policy strategies. We find that small-sized regional banks underline the significant positive effect of quantitative easing on gross domestic product and inflation that works through the securities holdings and leverage preferences. Monetary authorities should pay particular attention to policies for such banks and banks with a high level of non-performing loans. Deposit growth after a quantitative easing shock is only present in large-sized banks with low NPLs holdings.