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Counterfactual Simulation of the Effect of Large-Scale Monetary Easing on Japan's Financial System

July 18, 2024
Nobuhiro Abe*1
Naohisa Hirakata*2
Yuto Ishikuro*3
Yosuke Koike*4
Yuki Konaka*5
Yutaro Takano*6

Abstract

In this paper, we use a counterfactual simulation to analyze the effect on the function of financial intermediation in Japan of the decline in interest rates due to large-scale monetary easing. The results show that the decline in interest rates due to large-scale monetary easing put downward pressure on interest margins on loans and securities investments of banks. However, capital adequacy ratios were not necessarily pushed down significantly, because the decline in interest rates boosted the price of stocks and bonds and reduced credit risk. On the other hand, the improving real economy and lower lending interest rates increased demand from the corporate sector, leading to an increase in loans outstanding. In addition, the improvement in corporate finances due to an improved real economy, lower lending interest rates, and rising land and other asset prices, reduced credit risk in lending and contributed to an increase in loans outstanding. The results of the counterfactual simulation suggest that the decline in interest rates due to large-scale monetary easing contributed to the facilitation of financial intermediation.

JEL classification
E44, E59, G21, G28

Keywords
Unconventional monetary policy, financial system

The authors would like to thank the staff of the Bank of Japan for their valuable comments. The views expressed in this paper are those of the authors and do not necessarily reflect the official view of the Bank of Japan or of the Financial System and Bank Examination Department.

  1. *1Financial System and Bank Examination Department, Bank of Japan
    E-mail : nobuhiro.abe@boj.or.jp
  2. *2Niigata Branch, Bank of Japan
    E-mail : naohisa.hirakata@boj.or.jp
  3. *3International Department, Bank of Japan
    E-mail : yuuto.ishikuro@boj.or.jp
  4. *4Financial System and Bank Examination Department, Bank of Japan
    E-mail : yousuke.koike-1@boj.or.jp
  5. *5Financial System and Bank Examination Department, Bank of Japan
    E-mail : yuuki.konaka@boj.or.jp
  6. *6Monetary Affairs Department, Bank of Japan
    E-mail : yuutarou.takano@boj.or.jp

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