In recent years, nations have responded to the global financial crisis and its fallout with aggressive and unconventional monetary policies for economic stimulus. Quantitative easing and Abenomics are two such measures. Both these measures aim for very low interest rates low (even taking them all the way down to zero) in order to encourage borrowing and spending by consumers. In this article we will compare quantitative easing in the United States to Abenomics in Japan.
What is Quantitative Easing?
Under quantitative easing (QE), central banks print money to buy assets (typically government bonds) and thus inject money into the economy to create stimulus. Some economists point to Japan as the first country to use quantitative easing back in 2001. More recently, the Bank of England and the European Central Bank have also undertaken QE measures in recent years. In the United States, the Federal Reserve, the nation’s central bank, under the leadership of Ben Bernanke, used quantitative easing to fight the fallout from the subprime mortgage crisis. Lax subprime lending led to a housing market downturn and sparked a financial crisis in 2007 and 2008. The United States entered into its most severe recession in recent times. Even though the Federal Reserve had taken interest rates all the way down to zero in December 2008, the U.S. central bank saw a need to provide further economic stimulus in the form of quantitative easing.
What is Abenomics?
In Japan, stock prices and real estate prices skyrocketed in the 80s in an apparent bubble. When the bubble burst in the early 1990s prices entered a downward spiral resulting in a decades-long deflation. In response, the government tried many tactics, including launching the world’s first quantitative easing program in 2001. Japan’s deflation experience, characterized by falling prices and low economic growth, has lingered for years and impacted the standard of living in that country. As a platform for his 2012 re-election campaign, Japanese Prime Minister Shinzo Abe introduced a new economic stimulus plan, which was started off in April 2013 and has been dubbed Abenomics.
How Were They Applied?
In the United States, the quantitative easing program was effected in three parts known as QE1, QE2, and QE3. The Federal Reserve launched QE1 at the end of 2008 and purchased more than $1 trillion in mortgage-backed securities, $300 billion in Treasury bonds, and almost $200 billion in the debt of Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Banks. QE1 ended in 2010. Afterwards, the Federal Reserve launched QE2 and purchased another $600 billion in bonds. During the last phase of the program, QE3 which started in 2012, the Fed bought as much as $85 billion a month in Treasury securities and mortgage-backed securities.
Through Abenomics, the Japanese government plans to attack deflation though monetary stimulus, as well as provide fiscal stimulus through direct government spending of more than ¥10 trillion. Another aspect of Abenomics is based on undertaking structural change in the economy, such as liberalizing the labor market and cutting down on business regulations. The Bank of Japan aims to buy up as much as ¥80 trillion every year in Japanese government bonds. Japan’s public pension fund is also investing in stocks.
Impact of Stimulus
The Federal Reserve officially ended its quantitative easing program in 2014 but had already begun to taper its purchases at the end of 2013. The Fed hasn’t entirely ended its stimulus program though, since it continues to reinvest the proceeds from the bonds that it acquired as a result of quantitative easing. With all the stimulus initiated by the Fed, the U.S. economy has been growing and the housing market has been revived. However, the jury is still out whether these extraordinary measures have stimulated another bubble and what other fallout there might be in years ahead. While critics were gearing for inflation as a result of the massive stimulus, that hasn’t come about.
In Japan, the government hadn’t been as responsive as the U.S government. Abenomics was initiated after more than 20 years of deflation. While the program has been credited with providing some boost to the Japanese economy, it has been tough to change the deflation-oriented risk-averse mindset of Japanese businesses and consumers. The Japanese are also challenged by structural inefficiencies in their economy.
The Bottom Line
Quantitative easing and Abenomics are two versions of extreme economic stimulus programs undertaken in the face of troubled economic conditions. The U.S. actions were initiated in a timely fashion and appear to have been successful in providing stimulus. The Japanese actions have been initiated with a lag of many years and their ultimate efficacy remains to be seen.