Reversal of the BoJ's Balance Sheet Policy and Liquidity Dependence

This study empirically examines liquidity dependence in the Japanese banking system. Acharya and Rajan (2024) and Acharya et al. (2024) pointed out the phenomenon of liquidity dependence, which was observed during the U.S. quantitative easing and tightening policies and is regarded as a possible factor in liquidity crises in September 2019 and March 2023 crises in the U.S. Since quantitative easing was introduced in March 2001, the Japanese economy has experienced a more than 20-year period of quantitative easing, longer than that encountered in the U.S. Our macro and micro analysis employs more than 20 years of macroeconomic and bank-level accounting data and reveals that the same liquidity dependence phenomenon is observed in the Japanese economy. The Japanese broad deposit insurance system is superior to that in the United States, so an incident like the Silicon Valley Bank bankruptcy is unlikely to occur in Japan. However, partly with the rise of digital banking, we suggest that the Japanese economy needs to prepare for the impending major quantitative tightening—the so-called exit from the long-term quantitative easing policy.