The Effects on Expected Real Interest Rates and Expected Rates of Inflation through QQE September 8, 2015
Kikuo Iwata Deputy Governor of the Bank of Japan
Chart 1
Regime Change to Inflation Targeting What does the term "regime" mean in economic policy? Inflation and deflation are ultimately "monetary phenomena" ⇒ Price stability can be achieved through monetary policy Setting the price stability target "2 percent in terms of the year-on-year rate of change in the consumer price index (CPI)"
Chart 2
Tangibility of "Policy Regime Change" Quantitative and Qualitative Monetary Easing
Actions
Commitment
・Increase in Quantity
Clear commitment that the BOJ "will achieve the price stability target of 2% at the earliest possible time, with a time horizon of about 2 years."
Increase the monetary base1 at an Expansion annual pace of about ¥80 trillion (particularly through purchases of JGBs).
・Change in Quality Purchases of riskier assets (JGBs with longer remaining maturities, ETFs and J-REITs).
Expansion
Note: 1.Money supplied directly from the central bank to the financial system.
Chart 3 Lowering Expected Real Interest Rates through Working on Inflation Expectations(1) Real costs of borrowing, taking into account price changes (Borrowers' subjective expectations)
Subjective forecast based on respective price projections
Visible in financial markets or over the counter
Expected real interest rates ＝ Nominal interest rates Downward － Expected rates of inflation pressure by the QQE
Chart 4 Lowering Expected Real Interest Rates through Working on Inflation Expectations(2)
Nominal yield curves 2.5 (%)
2
1.5
1
0.94
Introduction of Comprehensive monetary easing (October 2010)
0.61
Introduction of QQE (April 2013)
0.38
August 2015
0.5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
years
Chart 5 Lowering Expected Real Interest Rates through Working on Inflation Expectations(3)
Expected real interest rates ＝ Nominal interest rates Analysis 2: The natural yield curve
－ Expected rates of inflation Analysis 1: Has Trend Inflation Shifted?
(References) Kaihatsu, S. and J. Nakajima(2015), ”Has Trend Inflation Shifted?: An Empirical Analysis with a Regime-Switching Model,” Bank of Japan Working Paper Series, No.15-E-3. Imakubo, K., H. Kojima, and J. Nakajima(2015), ”The natural yield curve: its concept and measurement,” Bank of Japan Working Paper Series, No.15-E-5.
Has Trend Inflation Shifted? (1)
Chart 6
Trend inflation is the private sector's perception about the level at which inflation is expected to prevail in the medium to long run. It serves as a practical measure of whether inflation expectations remain anchored in line with the price stability target. The authors assume regimes for the trend inflation at one-percent intervals, and estimate the probability of the trend inflation being in each regime. Inflation rate = F(previous inflation rates, trend inflation, output gap) + error term.
Chart 7
Has Trend Inflation Shifted? (2) Posterior regime probability of trend inflation %
-2%
-1%
0%
1%
2%
3%
100
80
60
40
20
0 85
90
95
00
Zero interest rate policy
05 Quantitative easing
10 Comprehensive monetary easing
14 Q4 QQE
Chart 8
Has Trend Inflation Shifted? (3) Posterior estimates of trend inflation % Trend inflation (weigthed average)
4
Realized inflation
3 2 1 0 -1 -2
-3 85
90
95
00 Zero interest rate policy
Note: The shaded area indicates the one-standard-deviation band.
05 Quantitative easing
10 Comprehensive monetary easing
14 Q4
QQE
Has Trend Inflation Shifted? (4)
Chart 9
Historical decomposition of realized inflation % 4
Shock Output gap
3
Trend inflation
2
Realized inflation
1
0
-1
-2
-3 85
90
95
00
Zero interest rate policy
05 Quantitative easing
10 Comprehensive monetary easing
14 Q4
QQE
The Natural Yield Curve (1)
Chart 10
The natural yield curve extends the idea of the natural rate of interest defined at a specific maturity – such as the overnight rate – to one defined for all maturities. Short-term nominal rates have hit the zero lower bound and the focus of monetary policy has shifted to the entire yield curve. The natural yield curve enables us to measure not only the effects of conventional monetary policy through short-term interest rate control but also those of unconventional monetary policy through government bond purchases and forward guidance.
Chart 11
The Natural Yield Curve (2)
Yield curves during each of the monetary easing programs 2
Zero interest rate policy (1999-2000) ％
Quantitative easing (2001-2006) 2
％
Natural yield curve 1
1
0
0
-1
Actual real yield curve
-1
-2
-2 5
10
years
5
Comprehensive monetary easing (2010-2013) ％ 2
2
1
1
0
0
-1
-1
-2
-2 5
10
years
10
years
QQE (2013- ) ％
5
10
years
Chart 12
The Natural Yield Curve (3) The 10-year natural yield and actual real yield % 3
2
Natural yield
1
0 Actual real yield
90bps1
-1
-2
95
97
99
01
Zero interest rate policy
03
05
Quantitative easing
Note: 1. The difference from 2013/Q1.
07
09
11
Comprehensive monetary easing
13
14/Q4
QQE
Chart 13
The Natural Yield Curve (4)
The interest rate environment and firm’s funding conditions Indicator of the interest rate environment：aggregated information on the interest rate gaps for all maturities 10
%
8
%pts Indicator of the interest rate environment
↑Accommodative
20 15
6 10 4 5
2 0
0
-2
-5
-4 -10 -6 ↓Contractionary
-8
Funding conditions (right scale)
Downward shift Bending
-15
Steepening -10 00
01
Zero interest rate policy
02
03
04
Quantitative easing
05
06
07
08
09
10
11
12
Comprehensive monetary easing
13
14
-20 Q4
QQE
