Comprehensive Monetary Easing In The Eurozone: Lessons Learnt From Japan

Abstract

The European Central Bank’s (ECB) unconventional monetary policy has so far failed to deliver the much-anticipated results. In October 2019, the euro area’s (EA-19) HICP-inflation fell to a three-year low of just 0.7% year-over-year (y/y), thus being far below the ECB’s goal of “below, but close to 2.00% over the medium term”. By November 2019, HICP-inflation had recovered to a modest 1.0% (y/y) with seasonally-adjusted Eurozone GDP growing at a disappointing 1.2% (y/y) in Q3 2019 compared with the same quarter of the previous year (Eurostat, 2019). Inevitably, these developments raise the question to what extent the ECB might eventually consider extending its Quantitative Easing (QE) program, i.e. its €2.6tn asset purchase programs (APP) beyond the ongoing €20bn-per-month purchase of fixed income securities. Any further easing could, for example, foresee an enhancement of the securities purchased to inter alia include shares of stock.

In contrast to widely held beliefs, this by no means were an entirely unprecedented phenomenon, but corresponded to measures (so-called comprehensive monetary easing, CME) adopted by the Bank of Japan (BoJ) as early as 2010 (Bank of Japan, 2010a). Notwithstanding the BoJ’s CME, however, HICP-inflation in Japan fell to 0.0% (y/y) in December 2019, the latest date for which data were available, which caused annual HICP-inflation for the full year to drop to only 0.8% (y/y).

Based on the experiences gained in Japan, and notwithstanding a potential revision of the ECB’s inflation target to a 1.5% to 2.5% range, this contribution will analyse the extent to which an expansion of the ECB’s set of hitherto employed unconventional monetary policies through CME could sustainably stimulate economic growth - and inflation - in the euro area. Preliminary results suggest a rather muted impact.