A policy overhaul by the Bank of Japan (BOJ) has led economists at Citi to declare an end to the era of quantitative easing (QE), but warn that major policy hurdles still remain for global central banks.
"The BoJ's September 21 decision to move to a framework of 10-year yield targeting marks the beginning of the end of QE (the focus on asset purchase size and balance sheet size as primary instruments of monetary policy), with notable read-through to other central banks," the economists, led by Willem Buiter, said in a new research note on Thursday morning.
QE is an unconventional form of monetary policy where a central bank essentially creates new money to buy assets like government bonds. This process aims to directly increase private sector spending and is tied to a target such as returning inflation to desired levels.
However, BOJ Governor Haruhiko Kuroda and his team have radically altered that policy. The bank implied that it was moving away from balance sheet expansion and would buy 10-year Japanese sovereign bonds so that the yield would hover around the zero percent level. This would amount to a shift towards asset price targeting, seen as a better and more sustainable way to facilitate its buying, rather than simply having the explicit target of increasing the amount of money it prints.