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

Nobuhiro Abe, Naohisa Hirakata, Yuto Ishikuro, Yosuke Koike, Yuki Konaka and Yutaro Takano
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Nobuhiro Abe: Bank of Japan
Yuto Ishikuro: Bank of Japan
Yosuke Koike: Bank of Japan
Yuki Konaka: Bank of Japan
Yutaro Takano: Bank of Japan

No 24-E-8, Bank of Japan Working Paper Series from Bank of Japan

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.

Keywords: Unconventional monetary policy; financial system (search for similar items in EconPapers)
JEL-codes: E44 E59 G21 G28 (search for similar items in EconPapers)
Date: 2024-07-18
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mon
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