November 30, 2009 / 9:31 AM / 10 years ago

FACTBOX - What is quantitative easing?

Nov 30 (Reuters) - The head of the Bank of Japan said on Monday it will act decisively in the event of renewed financial market turmoil, his strongest hint yet at fresh support for the economy that analysts say could involve buying more government bonds or a return to quantitative easing. [ID:nT43704]

But what is quantitative easing? Here are some details:

WHAT IS QUANTITATIVE EASING?

— Quantitative easing refers to ways of boosting economic growth after traditional monetary policy tools, such as interest rate targets, have been exhausted.

— Central banks flood the banking system with masses of money, more than is needed to keep official interest rates at zero or a low rate, to shore up financial systems and promote lending. They usually do this by buying up large quantities of assets from banks.

* JAPAN:

— The BOJ adopted quantitative easing, going beyond keeping interest rates at zero, in March 2001 after the economy was hit by the bursting dot-com bubble and remained stuck in a battle with deflation. The policy ended in 2006.

— Many experts, including some BOJ policymakers, were sceptical whether the policy had any direct effect in reviving the economy, but most agreed it helped limit deflation and avert a more serious banking crisis.

— The extra fund cushion meant banks, burdened with massive non-performing loans, avoided a liquidity crunch and were able to take bolder steps in cleaning up their loan portfolios.

— Instead of a traditional policy of raising or cutting short-term rates, the BOJ set a target for the amount of money it force-fed into the banking system. The funds were injected mainly through the BOJ’s purchases of government and commercial securities from banks.

* THE FED:

— Economists agree the U.S. Federal Reserve adopted a form of quantitative easing in its efforts to stabilise the financial system and help the economy, though in a different way from what the BOJ had conducted.

— The Fed cut the benchmark federal funds rate target to a range of zero to 0.25 percent, saying it would help markets and stimulate the economy by keeping its balance sheet at a high level.

— The Fed committed to purchasing large amounts of mortgage-related debt to help the housing market and to purchasing long-term government bonds to help keep rates low.

— This year the Fed ended its programme to buy Treasuries and is slowing down buying of mortgage-backed securities and agency debt. [ID:nN30432296]

— Since the bankruptcy of Lehman Brothers in September 2008, the Fed’s array of measures to shore up the financial sector has already caused its balance sheet to more than double in size to a record level above $2 trillion.

* BANK OF ENGLAND:

— The Bank of England’s benchmark interest rate has been at a record low of 0.5 percent since March, when the central bank also said it would inject 75 billion pounds into the recession-hit economy by buying bonds. It added 50 billion pounds to that amount in May and August and said on Nov. 5 it would add a further 25 billion pounds.

— On Nov. 5, it also said it would halve the pace at which it buys the assets. It says the programme will take three months to complete. [ID:nL5152809]

* BOJ:

— Japan’s top government spokesman said on Monday BOJ Governor Masaaki Shirakawa and Prime Minister Yukio Hatoyama will discuss quantitative easing when they meet this week to exchange views on the economy. [ID:nTKU105705]

— The government has declared Japan to be in deflation and has criticised as too optimistic the BOJ’s view that annual consumer price falls will gradually ease and that another recession is unlikely.

— The Democratic Party-led government, only two months old and largely untested on fiscal policy, has adopted the kind of heavy-handed approach towards the BOJ that previous governments have used to influence monetary policy. But it has been vague on exactly what it wants the BOJ to do.

— The BOJ has said there is little it can do beyond keeping interest rates at the current 0.1 percent to push up prices, setting up a clash with the government over whether fiscal policy or monetary policy should play a greater role in fighting deflation.

— In October, the BOJ did bow to government pressure by deferring a widely expected decision on withdrawing support for corporate finance.

— The BOJ buys 21.6 trillion yen of Japanese government bonds each year, and the government could pressure the bank to increase those purchases. (Writing by Stanley White, David Cutler and Jijo Jacob, Editorial Reference Units in London and Bangalore, Editing by Andy Bruce and Neil Fullick) ((david.cutler@thomsonreuters.com; +44 20 7542 7968; Reuters Messaging: david.cutler.reuters.com@reuters.net))

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