Quantitative easing, negative interest rates, and exchange fluctuations: The significance of disseminating information to the world as a researcher and educator

Researching finance and international finance from macro perspectives

With the aim of revitalizing its economy and overcoming deflation, Japan has implemented various monetary easing policies for over twenty years now, starting with a zero-interest-rate policy in 1999. Japan’s quantitative easing over the period from 2001 to 2006 in particular was a world-first economic measure, and the new and unprecedented measure of a negative interest rate policy has continued since 2016.

My field of research is monetary economics and international finance, including the effects of such monetary policies. Simply put, financial theory is the study of borrowing and lending money. I have a particular interest in macro fields that capture financial movements at the national and governmental levels. Specifically, my main research themes are the impact of the “Basel regulations” (international standards for maintaining bank soundness) on the lending behavior of Japanese banks, and the impact of fluctuations in foreign exchange rates on import prices, export prices, consumer price indexes, etc.

Expectations and challenges related to deregulation of the “firewall” between banks and securities firms

One topic that I am currently very interested in is debate over the elimination of “firewall” regulations, which provide informational barriers between banks and securities firms. Generally speaking, firewall regulations prohibit the sharing of customer information, even among banks and securities companies belonging to the same corporate group. Such regulations first appeared in the United States, but most such barriers were nearly eliminated there around twenty years ago, and Japan has been gradually easing them.

Banks and bank-affiliated securities firms claim that elimination of these regulations would allow them to provide one-stop services that would benefit their customers. For example, they would be able to propose corporate financing through a loan combined with corporate bond issuance, improving customer convenience. On the other hand, independent securities companies and customer companies claim that it would be difficult to refuse such offers, even if they want to separately consider the issuance of loans and corporate bonds, and there are also concerns about information leakages.

We economists generally favor deregulation, because deregulation facilitates the actions of free-market forces. However, we must keep in mind that relaxation of firewall regulations might increase within-group transactions, thereby hindering free competition.

The Japanese Financial Services Agency is considering measures such as abolition of such regulations on the condition of tightened financial supervision guidelines and strengthened monitoring, but in reality, the Japanese system for enforcing discipline by such financial institutions is a little different from those overseas. When a financial institution violates the law in Japan, the Financial Services Agency will take measures such as demanding business improvements or suspending business operations, but the more common method overseas is to impose fines. Japanese responses may thus be perceived as being less transparent than fines, which are made larger or smaller based on the seriousness of the violation and are thus easy to understand. I therefore believe that the abolition of firewall regulations will require caution: there are concerns as to whether violations such as information leaks will be punished accordingly, and whether Japan’s credibility will be damaged where disciplinary actions differ from international standards.

A Financial Services Agency Financial Council working group, of which I am a member, is in its final discussions regarding the abolition of firewall regulations. In the future, I would like to make the impact on the Japanese banking industry of this loosening and abolition of regulations one of my research themes.

The outcomes of twenty years of quantitative easing policies

Japan’s quantitative easing policies, which started in 2001, aim to boost the economy by having the Bank of Japan (BOJ) buy large quantities of government bonds and pump large amounts of money into the market. While this approach has its merits, such as raising asset prices and increasing consumption, it has long been pointed out that if it continues for too long, it may create a bubble that will eventually burst.

Haruhiko Kuroda, BOJ Governor since 2013, has set an inflation target policy of achieving 2% inflation rate in two years. The success or failure of this policy will depend on whether members of society change their behavior, on the assumption of an eventual 2% inflation. Governor Kuroda announced this policy so grandiosely that even students who were unfamiliar with monetary policy at the time knew the phrase “an inflation target of 2%.” Indeed, stock prices have risen, so I think his approach was correct and significant.

However, while we have approached something close to 2%, as a long-term policy it has run out of steam and has now become much less effective. Furthermore, the effects of the COVID-19 pandemic have made this target all the more difficult to reach. It is thus time to consider exit strategies, which is in itself a difficult problem. In 2013, U.S. Federal Reserve Bank Chair Ben Bernanke gave a speech in which he suggested he’d be “tapering” quantitative easing policies, causing stock markets in emerging markets to plummet. Considering the potential market impact, I think the BOJ is in a state where it cannot pull back, even if it wants to.

Recently, however, the situation has been changing. In May 2021, monthly purchases by the BOJ’s exchange-traded fund (ETF) fell to zero for the first time in the eight years and five months since December 2012. The BOJ had continued ETF purchases as a way to supply financial markets with money, but it seems that even signs of a reduction in purchases has not significantly affected stock prices. It remains to be seen whether it will be possible to skillfully maintain such a soft landing.

The significance of disseminating information to the world as a researcher

I believe it is important for university faculty to not only teach students, but also to conduct research and apply its results to society and education. In addition to being a member of the Financial Council, I participate in various off-campus groups that are directly and indirectly related to my research, including serving as chair of the Postal Administration Subcommittee of the Ministry of Internal Affairs and Communications at the Ministry of Internal Affairs and Communications, and as director of the Japan Bankers Association TIBOR Administration.

People in various positions, including researchers, practitioners, and ministry officials attend such off-campus councils and expert groups. Among these, practitioners for example can express their opinions on agenda items from a short-term perspective with a sense of what things are like in the field. By contrast, as researchers we can provide long-term, macro perspectives in comments regarding the direction in which Japan’s economy should head and whether market principles are smoothly functioning. I believe it is this difference in perspectives that makes participation by researchers in social activities meaningful.

Actually, some of the external conferences I have participated in in the past seemed to have had a predetermined conclusion, desiring my involvement as an expert just to lend a stamp of authority. I once let my thoughts on that matter slip to a young staff member at a certain Ministry, who replied, “That’s not true—even if your comments don’t change the results of this conference, they will affect the decisions of everyone there in various ways. Please don’t hesitate to speak your mind.” Encouraged by those words, I believe that my opinions and counterarguments from the standpoint of a researcher can be useful to society, so I am doing my best to convey my perspectives as a researcher.

An instructor’s duty is to teach difficult things without omission

I have come to the conclusion that college education for economics is a situation in which students should learn that “1 + 1 = 2,” then consider how and why that isn’t actually the case.

The “1 + 1 = 2” in economics is a fundamental understanding of the field, such as how prices and interest rates are set, and the impact of exchange rate fluctuations on the balance of payments. These are topics mainly learned in courses taken by first- and second-year students, such as microeconomics, macroeconomics, econometrics, and economic history. As students progress through their course of studies, however, in applied subjects such as financial theory and labor economics they learn that the actual economy does not operate according to such basic theory. For example, students first learn the basic principle that prices are set according to supply and demand, but the truth is that price fluctuations take time, so students must understand that prices will not neatly follow the supply–demand curves shown in textbooks. They must also think about why that is the case.

In a monetary policy class, it is not difficult to teach what the current negative interest rate policy is and what it means. But one doesn’t need a college course to learn that; an Internet search would do. Before explaining actual monetary policy in my class, I first teach basic theories such as supply and demand in financial markets and the mechanisms by which interest rates are determined as an equilibrium. When doing so, I don’t use words, but rather have students work things out mathematically, using equations.

When the math comes into play, some students think the subject is too difficult. Even so, I believe trying to teach while avoiding things the students might find difficult is to do them a disservice. If the students find something difficult, I believe it the instructor’s responsibility to find a way to make it easy to understand while still conveying the matter in full.

A university education is also for developing the ability to understand the essence of what is happening and to judge its correctness after entering society in the future. I therefore consider it an instructor’s duty to incorporate new cases and verification methods that we find through our research into our teaching, and to provide guidance for becoming more useful in the future, and I engage in instructing my students with that in mind every day.

Judgment that is not influenced by short-sighted information

Nowadays, the media tends to emphasize only short-sighted effects when reporting economic and financial information, such as interest rates and exchange rate fluctuations. Exchange rates are indeed determined simply by supply and demand, and while the factors driving that supply and demand are highly complex, economics can organize and explain the factors having a major impact.

In addition, daily economic news tends to emphasize negatives, seemingly wanting to make a big deal about how “the economy is worsening,” regardless of whether the yen is strong or weak. In reality, however, there are winners and losers whether the yen has become stronger or weaker, and it is often the case that the losers are just responding more shrilly. Through their study of economics, I hope my students will develop the ability to simply grasp the events happening before their eyes and to make their own judgments, without being swayed by superficial matters. I hope I can continue to communicate the results of my research in educational settings and in society, thereby conveying a way of thinking by which everyone can correctly understand the economy.