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Counterfactual Simulation of the Effect of Large-Scale Monetary Easing on Japan's Financial System

Author

Listed:
  • Nobuhiro Abe

    (Bank of Japan)

  • Naohisa Hirakata

    (Bank of Japan)

  • Yuto Ishikuro

    (Bank of Japan)

  • Yosuke Koike

    (Bank of Japan)

  • Yuki Konaka

    (Bank of Japan)

  • Yutaro Takano

    (Bank of Japan)

Abstract

In this paper, we use a counterfactual simulation to analyze the effect on the function of financial intermediation in Japan of the decline in interest rates due to large-scale monetary easing. The results show that the decline in interest rates due to large-scale monetary easing put downward pressure on interest margins on loans and securities investments of banks. However, capital adequacy ratios were not necessarily pushed down significantly, because the decline in interest rates boosted the price of stocks and bonds and reduced credit risk. On the other hand, the improving real economy and lower lending interest rates increased demand from the corporate sector, leading to an increase in loans outstanding. In addition, the improvement in corporate finances due to an improved real economy, lower lending interest rates, and rising land and other asset prices, reduced credit risk in lending and contributed to an increase in loans outstanding. The results of the counterfactual simulation suggest that the decline in interest rates due to large-scale monetary easing contributed to the facilitation of financial intermediation.

Suggested Citation

  • Nobuhiro Abe & Naohisa Hirakata & Yuto Ishikuro & Yosuke Koike & Yuki Konaka & Yutaro Takano, 2024. "Counterfactual Simulation of the Effect of Large-Scale Monetary Easing on Japan's Financial System," Bank of Japan Working Paper Series 24-E-8, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp24e08
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Anil K. Kashyap & Caspar Siegert, 2020. "Financial Stability Considerations and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 231-266, February.
    3. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    4. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 414-435, October.
    5. Takuji Kawamoto & Takashi Nakazawa & Yui Kishaba & Kohei Matsumura & Jouchi Nakajima, 2021. "Supplementary Paper Series for the "Assessment" (2): Estimating Effects of Expansionary Monetary Policy since the Introduction of Quantitative and Qualitative Monetary Easing (QQE) Using the Macroeconomic Model (Q-JEM)," Bank of Japan Working Paper Series 21-E-4, Bank of Japan.
    6. Hirakata, Naohisa & Sunakawa, Takeki, 2019. "Financial frictions, capital misallocation and structural change," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
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    Cited by:

    1. Atsuki Hirata & Sohei Kaihatsu & Yoshiyasu Kasai & Hiroki Yamamoto & Jouchi Nakajima, 2024. "Effects and Side Effects of Unconventional Monetary Policy: A Shadow Rate Approach," Bank of Japan Working Paper Series 24-E-21, Bank of Japan.
    2. Shunsuke Haba & Yuichiro Ito & Yoshiyasu Kasai, 2025. "The Impact of Negative Interest Rate Policy on Interest Rate Formation and Lending," Bank of Japan Working Paper Series 25-E-1, Bank of Japan.

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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