Managing the Exit: Lessons from Japan's Reversal of Unconventional Monetary Policy

IMF Working Papers, May 1, 2010

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Canonical URL: Managing the Exit: Lessons from Japan's Reversal of Unconventional Monetary Policy

Authors: Murtaza H Syed, Hiromi Yamaoka
Date: May 1, 2010
Core focus: Revisits the Bank of Japan’s experience exiting unconventional monetary policy following a severe financial crisis and draws lessons for managing an orderly exit in advanced economies that expanded central bank balance sheets through unorthodox measures.
Central observation: Unorthodox measures, including purchases of public and private assets, significantly enlarged central bank balance sheets; as recoveries take hold, attention shifts from crisis response to orchestrating an exit and returning to a more normal monetary framework.
Emphasis: Technical aspects, practicalities, and communication strategies for exit management.

Historical case: Japan attempted an exit five years after recovering from a severe financial crisis; that experience provides relevant lessons.
Transferable elements from Japan’s experience:
- Communication
- Flexibility
- A sufficient set of policy tools and a strategy for using them
- Safeguards against potential losses
- Revival of risk appetite through decisive restructuring of balance sheets
- Refinements to the monetary framework upon exit
Caveat: The nature of assets acquired during the present crisis could pose additional complications compared with Japan’s case.

Unorthodox measures described include purchases of public and private assets that enlarged balance sheets.
Importance of having:
- A sufficient set of policy tools
- A clear strategy for sequencing and deploying tools during the exit
- Safeguards to manage potential losses arising from large-scale asset holdings
- Measures to facilitate the revival of private sector risk appetite, including restructuring of balance sheets

Clear and credible communication is highlighted as a critical component of managing an orderly exit.
Messaging should address:
- The timing and sequencing of exit measures
- The rationale for chosen tools and safeguards
- Expectations management to reduce the risk of disruptive market reactions

Subject areas: Asset and liability management, Banking, Central bank policy rate, Financial institutions, Financial services, Financial statements, Liquidity, Monetary policy, Public financial management (PFM), Stocks, Unconventional monetary policies
Keywords: balance sheet, BoJ official, central bank, Central bank policy rate, Exit, exit announcement, Financial statements, Global, JGB purchase, Liquidity, Monetary Policy, policy reaction function, Quantitative Easing, Stocks, Unconventional monetary policies, WP