Many macroeconomists and policymakers have debated the effectiveness of further injection of base money at zero short-term interest rates. This paper takes up the Japanese experience of the quantitative monetary-easing policy (QMEP) that was conducted in 2001—2006. In particular we measure the effect of the QMEP on aggregate output and prices, and examine its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.
This paper reviews the IMF’s recently published ‘institutional view’ on capital flows management, focusing on its views on the management of capital inflow surges. The IMF’s acceptance of the use of capital controls and other capital flow management measures (CFMs) in certain circumstances, is a step forward. However, we argue that the IMF’s recommendations as to when CFMs may be legitimately used are difficult to apply in practice, as it is difficult to ascertain whether the conditions that the IMF prescribes are fulfilled, such as whether exchange rates are overvalued. Moreover, the premise that macroeconomic and other measures should be preferred over CFMs, and that any CFMs should therefore be temporary, targeted and transparent, are unduly restrictive. We argue that CFMs could be particularly useful and appropriate in a financial environment where global push factors rather than country specific factors tend to be the dominant drivers of capital flows, and that CFMs should be considered as a potentially useful policy in the toolkit, on par with other policy measures.
Intraday minute-by-minute data of Tokyo and Shanghai stock exchanges from January 7, 2008, to January 23, 2009, are analyzed to investigate the interaction between the Japanese and Chinese stock markets. We focus on two windows of time each day during which the two stock exchanges trade shares simultaneously, and specify appropriate lags in vector autoregression (VAR) estimations. Granger causality tests, variance decompositions, and impulse response functions show that, while Tokyo is impacted by Chinese stock price movements, China is relatively isolated. This implies that investors in Japan are more internationally oriented and alert to foreign markets than those in China.
This paper discusses important policy actions in Japanese banking regulation under the global financial crisis, which seriously damaged the Japanese economy. First, the state of Japan's banking industry and an outline of Japan’s banking regulations are discussed. Second, we explain the impacts of the global financial crisis on the Japanese economy and Japanese banks. Then we explain various responses of the small-and-medium-sized enterprise (SME) financing support program and banking regulations against the global financial crisis, including reintroduction of the public fund injection scheme, revision of capital adequacy regulation, and establishment of the Act to Facilitate Financing for SMEs. The measures taken by the Financial Services Agency (FSA) were effective in terms of preventing the shocks from resulting in “the greatest crisis of the century.” However, these measures are temporary ways to avoid exacerbation of the problems; they are not remedies for the structural issues facing the Japanese economy, SMEs, and financial institutions.
It is widely accepted that the required return on investment is regarded as the weighted average cost of capital. This method for deciding whether an investment should be executed is theoretically appropriate in only a few models, such as the Modigliani and Miller (1963) hypothesis. In a capital structure model that includes bankruptcy costs and agency costs, this study calculates the required return from the model. We examine difference between the WACC computed from data and the required return estimated from the model. This study also shows that the pecking order hypothesis holds for investment financing in optimal capital structure.