The Bank of Japan’s latest quantitative easing program* hasn’t been very successful (so far, anyway) in pushing consumer prices higher.

The aggressive bond-buying program, launched in April 2013, was designed to jolt Japan out of more than a decade of deflation and spur economic expansion. Along with fiscal stimulus and structural reforms, quantitative easing—or QE—is one of the “three arrows” in Prime Minister Shinzo Abe’s quiver aimed at reviving the Japanese economy.

But even with Japan’s central bank upping asset purchases in November 2014 to an annual pace of ¥80 trillion (roughly $650 billion at today’s exchange rate) to counter the effects of falling consumption and crude oil prices, inflation is still running at somewhere around 0% to 0.5% even after stripping out the latest value-added tax hike. That level is still far off the Bank of Japan’s target of 2%.

Collateral effects from quantitative easing

Of course, providing that level of monetary stimulus has had other ramifications. The yen has depreciated by about 20% against the dollar since the program was announced. And central bank purchases of Japanese government bonds (JGBs) have pushed down borrowing costs. In fact, the pace of its purchases has contributed to yields on short-term JGBs moving into negative territory at times.

Institutional investors like Japan’s Government  Pension Investment Fund have effectively been crowded out of the government bond market because the Bank of Japan is snapping up so much supply. So they’ve had to go elsewhere.

The local stock market has been one beneficiary. The Nikkei 225 Index has risen sharply since the program began, climbing past the 20,000 mark to reach an 18-year high.

And money has flowed out of the country as well in search of higher-yielding opportunities. One destination has been U.S. Treasuries: Japanese investors now have well over $1.2 trillion in these securities, making the Japanese, along with the Chinese, the largest foreign holders. The 2.12% yield of the 10-year U.S. Treasury bond at the end of May might not seem that enticing, but it was well above the 0.39% yield on offer from JGBs of the same maturity.

Potential counterweight to global monetary tightening

In a low-growth, low-inflation landscape, ultra-loose monetary policy and quantitative easing programs like Japan’s—and the one launched in March by the European Central Bank—may help soften the impact of monetary tightening in the United States when the Federal Reserve eventually begins to raise interest rates. (See the chart below showing the rise in central bank assets relative to 2008 GDP.)

The International Monetary Fund expects Japan’s quantitative easing to help counter the impact of tightening financial conditions globally. The IMF anticipates that portfolio rebalancing by Japanese banks and institutional investors over the medium term could result in additional capital outflows of as much as $260 billion.

When liftoff in the United States does happen, expect to see volatility pick up. Investors who are broadly diversified across bond maturities and bond markets, however, are likely to have a less bumpy ride.

Index of global central bank assets to 2008 GDP




Notes: The index was rebased to 100 in January 2008. Data are as of May 2015. The dotted lines indicate our projections. Sources: Vanguard calculations using data from Bank of Japan, Cabinet Office, Government of Japan, European Central Bank, European Commission, Eurostat, Moody’s Data Buffet, Thomson Reuters Datastream, U.S. Board of Governors of the Federal Reserve System, and U.S. Bureau of Economic Analysis.


* “Quantitative easing” is an unconventional monetary policy that involves central bank purchases of securities such as government bonds with the aim of lowering interest rates and spurring lending.


For a deeper discussion of how Japan is trying to revive its economy after two decades of stagnation, see our recent paper Japan: The Long Road Back to Inflation, available at and part of our Global Macro Matters series.


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