sent 23 February 2001
Re: "Govt, BOJ must act to fight deflation," Financial Times, 19 February 2001.

Quantitative easing is simply a 'bank tax'

Sir,

The Group of Seven's call for monetary easing to solve Japan's economic problems seems to misunderstand bank mechanics. I suspect that most who advocate quantitative easing do not recognise that it is but a "bank tax". The purchase of securities by the Bank of Japan reduces private sector holdings of Japanese government bonds and increases member bank reserve account balances at the BOJ. As reserve accounts do not earn interest, banks are left holding a higher percentage of their capital in these non-interest-bearing BOJ accounts.

Quantitative easing would reduce the interbank rate in Japan from 0.25 per cent back to 0 per cent. But, since lending is not reserve constrained, loans would increase only to the extent that lower interest rates would attract additional borrowers. Recent experience shows that to be negligible. Furthermore, since Japan is a large net payer of interest on its public debt, cutting rates reduces government interest payments and therefore private sector income.

Warren B. Mosler
Principal, AVM LP
250 So Australian Avenue
W Palm Beach, FL 33401, USA

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