Japanese Monetary Policy: The Effectiveness of Quantitative Easing

The purpose of this paper is to analyze the effects of Japanese monetary policy from 2001-2010. In 2001 the Bank of Japan, Japan’s central bank, began using an unconventional monetary policy tool known as quantitative easing. The desired effect of quantitative easing is to inject money directly into the country’s money supply. This is accomplished through the purchasing of commercial and private financial assets, mainly bonds, by the central bank of the participating country. This paper tests the hypothesis that when the value of the Japanese yen (JPY) is lowered versus the United States Dollar (USD) that the number of Japanese goods purchased by the United States from Japan would increase. This hypothesis is based on The Law of Demand, which states that if all other factors remain equal, the higher the price of the good, the lower the quantity of demand. Japanese leaders’ manipulation of the yen over recent years has generated a favorable exchange rate for exporters, according to some economists. Economic statistics such as the Bank of Japan’s annual bond purchasing (quantitative easing), the USD versus the JPY exchange rate, and Japan’s net exports to the United States are analyzed using correlation and regression analyses in this paper, as a means of testing the hypothesis stated above