Wed 1 Aug, 2018 08:40 am
I think I understand how Quantitative Easing works in the US - the Federal Reserve buys US debt from the US Treasury to reduce the supply of US debt paper available on the open market. Implicit in this scheme is the implied promise that eventually QE will be unwound and the Fed's balance sheet "normalized". I suppose part of the point of that implied promise is to reduce the inflationary impact of QE and to set the expectation that the accommodation will eventually be removed.
The Bank of Japan has been doing something similar, but my understanding is that it has done so much of it that the market for Japanese Government Bonds is almost dead - on some days no JGBs are traded at all. And yet Japan is still undershooting it's inflation target.
My question is why does Japan not simply announce that the JGBs (or a portion of them) bought via it's QE program will simply be retired rather than ever unwound. The BoJ already printed the money and bought the JGBs, it could simply tell the Ministry of Finance that the debt is "forgiven". That would be, in effect, straight money printing rather than a temporary policy move, and, it seems to me, a more potent action.
Would this not help the BoJ in its fight against deflation, and also reduce the Japanese government's overall level of debt?
And it may not be far from a simple admission of the truth anyway. Even in the US, it's unclear that the Fed will ever be able to completely normalize its balance sheet and completely unwind QE before it next needs to begin adding accommodation again.