Bank of Japan and Non-standard Policy Measures

June 18, 2013

Non-standard Monetary Policy Measures

European Central Bank Workshop

Shuji Kobayakawa Monetary Affairs Department

Bank of Japan

1. Quantitative and Qualitative Monetary Easing (QQE)

– Basic Features

– Transmission Channel (Interest Rates, Portfolio Rebalancing, Inflation Expectations)

2. Loan Support Program

– Growth-Supporting Funding Facility

– Stimulating Bank Lending Facility

Views expressed hereafter are those of mine and do not necessarily represent those of the Bank of Japan. If you have any questions or comments, please do not hesitate to contact me at shuuji.kobayakawa@boj.or.jp.

Contents

1. QUANTITATIVE AND QUALITATIVE MONETARY EASING (QQE)

Quantitative and Qualitative Monetary Easing

4

Overcoming Deflation

Price Stability Target = “2 percent”

Time Horizon = “2 years”

Monetary Base = “double” in 2 years

Avg. Remaining Maturity of JGB Purchases

= “more than double” in 2 years

Quantitative and Qualitative Monetary Easing

5

1. Adoption of the monetary base control

2. Increase in JGB purchases and their maturity extension

3. Increase in ETF and J-REIT purchases

4. Continuation of the QQE

Main operating target: uncollateralized overnight call rate => monetary base The monetary base will increase at an annual pace of about 60-70 tril. yen.

With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 tril. yen. JGBs with all maturities will be made eligible for purchase, and the average remaining maturity of the Bank’s JGB purchases will be extended from slightly less than 3 yrs to about 7 yrs -- equivalent to the average maturity of the amount outstanding of JGBs issued.

With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and J-REITs so that their amounts outstanding will increase at an annual pace of 1 tril. yen and 30 bil. yen respectively.

The Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.

6

Bank of Japan’s Balance Sheet Projection (trillion yen)

7

Monetary Base and the Bank’s JGB holdings

New Phase of Monetary Easing

Purchase of ETFs and J-REITs Purchase of JGBs

The Bank will achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about two years.

Lowering longer term interest rates

Increasing lending and investing in risk assets

Changing expectations

drastically

Clear commitment

1st channel 2nd channel 3rd channel

New phase of monetary easing both in terms of quantity and quality

Loans Asset prices

Rise in growth rate

Improvement in the output gap Rise in inflation expectations

ＣＰＩ

Decline in real rates

Lowering risk premia of asset prices

1st channel

Transmission Channel: Summary

8

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Japan

United States

Germany

%

13/1 13/2 13/3 13/4 13/5 13/60

0.5

1

1.5

2

2.5%

9

Financial Conditions

10-year Government Bond Yields Bank Lending Rates in Japan

Note: Lending rates are the average contracted interest rates (six-month backward moving averages on new loans and discounts). Sources: Bank of Japan; Bloomberg.

CY CY

%

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

80 85 90 95 00 05 11

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

100,000

11 /2Q 3Q 4Q 12 /2Q 3Q 4Q

Portfolio: Banks and Insurance Companies

10

-600,000 -400,000 -200,000

0 200,000 400,000 600,000 800,000

1,000,000 1,200,000 1,400,000

80 85 90 95 00 05 11

Currency and depositsLoansSecurities other than sharesShares and other equitiesOutward investments in securities

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

11 /2Q 3Q 4Q 12 /2Q 3Q 4QFY

FY

100 million yen

100 million yen

100 million yen

100 million yen

(1) Depository Corporations

(2) Insurance

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

80 85 90 95 00 05 11

Insurance and pension reserves

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

11 /2Q 3Q 4Q 12 /2Q 3Q 4Q

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

80 85 90 95 00 05 11

Currency and depositsLoansSecurities other than sharesShares and other equitiesOutward investments in securities

-30,000

-20,000

-10,000

0

10,000

20,000

11 /2Q 3Q 4Q 12 /2Q 3Q 4Q

Portfolio: Pension Funds and Households

11

FY

FY

100 million yen

100 million yen

100 million yen

100 million yen

(1) Pension Funds

(2) Households

Note 1: Yield spreads between fixed-rate coupon-bearing JGBs and inflation-indexed JGBs. Figures for “Longest” are calculated using yield data for the inflation-indexed JGBs that have the longest maturity at each period. Sources: QUICK; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

05 06 07 08 09 10 11 12 13

2 to 10 years ahead

1 to 2 years ahead

Over the next year

6 to 10 years ahead (Consensus Forecast)

ann. avg., %

CY

(Quick Bond Monthly Survey)

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

05 06 07 08 09 10 11 12 13

Break-even inflation rate for Inflation-Indexed JGBs (Longest)

CY

%

1

Inflation Expectations

12

2. LOAN SUPPORT PROGRAM

Loan Support Program

14 Introduced in June 2010 Introduced in December 2012

3.7 trillion yen

Loan Support Program

Growth - Supporting Funding Facility

Total Amount: 5.5 trillion yen Main Rules 3.5 trillion yen

Equity investments and ABL

0.5 trillion yen

Small - lot investments and loans

0.5 trillion yen

Loans in the U.S. dollar

U .S. dollar funds equivalent

to 1 trillion yen

Amount Outstanding: 3.6 trillion yen

Stimulating Bank Lending Facility

Total Amount: "unlimited"

Simply Calculated Amount from the Recent Data: 15 trillion yen Note: According to the August 2012 data, the amount of loans increased by approximately 15 trillion yen in a year for financial institutions whose lending increased.

Amount Outstanding: 3.2 trillion yen

Maximum 4 years

Loan rate: Market interest rate

Maximum 4 years

Loan rate: currently 0.1%

Loans

Equity investments

and ABL

Bank of Japan \ 5.5 trillion

\ 3.5 trillion \ 0.5 trillion \ 0.5 trillion

Main Rules

Equity investments and ABL

Small-lot investments and loans

Loans in foreign currencies

U.S. dollar funds equivalent to \ 1 trillion

U.S. dollar lending

Growth-Supporting Funding Facility: Micro Approach => Playing a catalytic role in encouraging financial institutions’ new lending

to businesses with growth potential

15

Japanese Financial

Institutions

Foreign Financial

Institutions

(Offices in Japan)

Japanese Firms

Foreign Firms

Japan

Loans to Japanese firms overseas denominated in foreign currencies are subject to the U.S. dollar lending arrangement.

Collateral

Growth-Supporting Funding Facility: Details 1. Counterparty: financial institutions (Japanese financial institutions + foreign

financial institutions’ offices in Japan)

2. Total amount: 5.5 trillion yen

3. Maximum amount to each counterparty: 150 billion yen

4. Duration of loans: 1 year in principle, max of 4 years by rollovers

5. Form of loans: provided in the form of the Bank of Japan’s Funds-Supplying Operations against Pooled Collateral

16

18 Possible areas for strengthening growth potential

Research and development Business serving the needs of senior citizensSetting up a new business Business in the content creation industryBusiness reorganization Tourism businessInvestment and business deployment overseas Regional and urban revitalization businessScience and technology research Agriculture, forestry, and fisheries businessDevelopment and upgrading of social infra. Business which supports the creation of housing stockEnvironment and energy business Disaster prevention businessBusiness for securing/developing natural resources Employment support, human resources developmentMedical and nursing care Childcare services business

Loan Disbursement by Areas

Growth-Supporting Funding Facility: Evidence

billion yen

17

Amounts Outstanding by Areas billion yen

Loan Disbursement and Borrowers billion yen # of banks

Japanese Financial

Institutions

Maximum 4 years

Loan rate: currently 0.1%

Japanese Firms

Loans in yen

Loans in foreign currencies

18

Foreign Financial

Institutions

(Offices in Japan)

Stimulating Bank Lending Facility: Macro Approach => Promoting financial institutions’ new lending to the private sector and helping increase proactive credit demand of businesses and households

Foreign Firms

Households

Japan

Overseas

Japanese Firms

Foreign Firms

Households

Bank of Japan

“Unlimited”

Net increase in lending

Collateral

Stimulating Bank Lending Facility: Details 1. Counterparty: financial institutions (Japanese financial institutions + foreign

financial institutions’ offices in Japan)

2. Total amount: UNLIMITED

3. Maximum amount to each counterparty: net increase in lending (average amount of a specified quarter) ― (average amount in Oct-Dec 2012)

4. Duration of loans: 1 yr, 2 yrs, or 3 yrs (overall duration including rollovers ≤ 4 yrs)

5. Form of loans: provided in the form of the Bank of Japan’s Funds-Supplying Operations against Pooled Collateral

19

Outstanding Balance of Loans and Number of Borrowers: June 2013

billion yen # of banks

Note : Figures for the Growth-Supporting Funding Facility are those under the “Main Rules” only.

3,152 3,262

70

124

20

%

Lending Activity by Financial Institutions

Source: Principal Figures of Financial Institutions, Bank of Japan.