Policy Multipliers in Japan Under QQE

IMF Working Papers, June 7, 2024

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Purpose: Test whether Japan's key macro policy multipliers have declined since 2013, the year that Japan introduced Qualitative and Quantitative Easing.
Model: Augmented Blanchard-Perotti structural VAR model introduced in Ouliaris and Rochon (2021).
Shocks analyzed: central bank’s asset holdings, interest rates, and debt levels relative to GDP.
Target: Dynamic effects of these shocks on economic activity in Japan.

Both the expenditure and tax multipliers of Japan have fallen, implying that the effectiveness of fiscal policy in Japan declined following the change in monetary policy.
The efficacy of quantitative easing is small, implying the need for huge interventions to have a significant effect on real GDP.
The effectiveness of quantitative easing has declined since 2013.
The reduction in policy multipliers can be attributed to the upward trend in the government debt level relative to GDP which, despite historically low interest rates, has increased Japan’s structural deficit, and the likelihood of reduced expenditures and higher taxes going forward.

Increased government debt relative to GDP is identified as a key factor reducing policy multipliers.
Historically low interest rates have not prevented an increase in the structural deficit.
Higher structural deficit raises the likelihood of future fiscal consolidation via reduced expenditures and higher taxes, which dampens current policy effectiveness.
Quantitative easing has limited real GDP impact per unit of intervention, and its marginal effectiveness has decreased post-2013.

Fiscal policy effectiveness has weakened since the adoption of QQE, reducing the potency of both expenditure and tax measures.
Given the small efficacy per unit of quantitative easing, very large central bank asset interventions would be required to materially affect real GDP.
Rising government debt relative to GDP suggests a heightened risk of future fiscal tightening that would further constrain policy multipliers.