Masaaki Shirakawa spent 39 years at the Bank of Japan, becoming its governor in April 2008. Exactly six years earlier, as adviser to the governor, he evaluated the experience of the first year of QE in a prophetic paper. He drew a skeptical tentative conclusion about the efficacy of the initiative, emphasizing the difficulty for a central bank to provide stimulus once the economy had begun to experience the zero bound on short rates. At the time he understandably focused on the buildup of excess reserves at banks:

[T]he author would like to again emphasize the importance of the fact that Japan’s economy is confronting zero interest rates … Based on this, in a situation where there is little room for a further decline in short-term interest rates, the effects of monetary easing will necessarily be limited. The fact that economic activity has not been stimulated despite an aggressive increase in reserves since March 2001 seems to be consistent with what such standard theory predicts. This kind of conclusion may frustrate readers who seek to find a monetary policy solution. Some may argue that, without other options, the Bank of Japan should try unconventional monetary policy even if the effects are not certain. However, given the difficulty of the problems facing Japan’s economy, before jumping to such conclusion, economists are expected to present sober analysis of the situation fully utilizing all the information and knowledge available.¹

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© 2016 David E. Lindsey

Policies and ethics