The Global Economy: Expansionary Fiscal Policy & Monetary Easing

The Global Economy: Expansionary Fiscal Policy & Monetary Easing














The Global Economy: Expansionary Fiscal Policy & Monetary Easing

Quantitative Easing involves the use of Expansionary fiscal policies and monetary easing in order to stimulate the national economy in the event that the customary monetary policy deems ineffectual. Usually, the respective economy’s central bank applies this strategy by purchasing financial assets from institutions such as commercial banks in order to amplify its monetary base. This is different from the typical strategy of purchasing or vending government bonds for maintaining the interest rates within the market at a particular target value. Recently, the economy of Japan inaugurated an expansionary fiscal policy and monetary easing. Specifically, the monetary easing strategy focused on doubling the money supply of the country based on the injection of US$ 500 billion within the economy. This is due to the effects of the Global Economic Crisis, which devalued the Yen. As such, by implementing the policies, the economy of Japan focused on fighting deflation within the country. Nevertheless, using quantitative easing poses significant effects to not only Japan but also other domestic and global economies over the short-term and the long-term.

As mentioned, quantitative easing involves initiating an unconventional monetary policy by the central bank in order to augment the respective economy based on the failure of the customary monetary policy. A typical monetary policy involves a process through which the central bank manages money supply in order to endorse economic growth and constancy. According to Langdana (2009), expansionary monetary policies concentrate on amplifying the sum money supply within a particular country in a short-term basis. Usually, such policies support the Circular Flow of Income. Accordingly, since expansionary monetary policies focus on fighting unemployment within recession through the decrease of rates of interest, they motivate businesses to expand, which in turn increase the amount of goods within the market. This persuades an increase in purchasing power from consumers due to the wide variety of goods within the market. As such, an increase in purchasing power correlates to an increase in revenue to the government. As such, the income flow throughout the economy constitutes an incessant flow of manufacture, revenue and expenditure (Dolan, 2007).

Nevertheless, the sole objective of conducting the monetary policy by the Bank of Japan involves the maintenance of price stability in order to develop the national economy soundly. This is in accordance to the problem of deflation evident within the country ever since the collapse of the Bubble economy in the 1990s (Fujiki, Okina & Shiratsuka, 2001). At that time, the Bank of Japan integrated a Zero-Interest Rate policy in which the Japanese economy would focus on receiving substantial funds in order to circumvent potential intensification of deflation and economic decadence. Consequently, the policy concentrated on working on market prospects in order to endorse stability of interest rates. Therefore, in order to this, the Bank of Japan deemed it necessary for the economy to possess a stable supply of money at a significant degree in order to combat the pressures emanating from deflation. As such, there was the lowering of interest rates and the provision of a sufficient monetary base.

Irrespective of the adoption of the Zero Interest-Rate Policy in the 2000s following the effects of the Bubble economy, the Japanese economy continued facing sluggish performances based on incessant deflationary pressure. As such, Japan embarked on solving this problem through adoption of quantitative easing. In this case, quantitative easing involved the adoption of an expansionary fiscal policy and monetary easing in order to counter deflation (Iwamura, Kudo, & Watanabe, 2005). Berube and Pinto (2010) surmise that an expansionary fiscal policy incorporates the spending performed by the government in order to exceed the revenues arising from tax. Usually, expansionary fiscal policies undergo applications in times of recession. Even though an expansionary fiscal policy possesses complexity based on its adoption within the Japanese economy, it is sufficient for this operation. According to Langdana (2009), an expansionary monetary policy usually entails the country’s central bank purchasing government bonds at short-term to decrease interest rates at short-term. However, this does not apply in the case of the Japanese economy based on the realization that its interest rates are nearly at zero percent (Shirakawa & Ginko, 2002).

Since a typical monetary policy could not assist in decreasing interest rates in the Japanese economy, quantitative easing was necessary to implement. According to Wieland (2009), quantitative easing is important since it kindles the economy due to the considerable purchase of long-term assets, which in turn, decrease the interests in the long-term. As such, quantitative easing increases the values of the purchased financial assets, which leads to a significant decrease in the assets’ return value. With respect to the Japanese economy, using quantitative easing allowed the Bank of Japan to disseminate excess liquidity to banks. The reason for this was to induce private lending which would leave significant supply of surplus reserves and thus, a diminutive risk of a deficiency in liquidity. In order to carry out this strategy, the Bank of Japan concentrated on purchasing a greater quantity of the government bonds than the required amount in order to zero the interest rates.

Notably, another rationale for the adoption of quantitative easing, aside from leveling zero interest rates, involved decreasing the inflation target to 2 percent. Through the adoption of quantitative easing, the economy of Japan will experience an increase in commodity prices. Furthermore, the Bank of Japan will focus on buying government bonds for the long-term as well as financial assets that possess considerable risk. Such precarious financial assets comprise Investment trusts within the country’s real estate and exchange-traded finances (Bowman, 2011). Investing in these financial assets will ensure that the Japanese economy experiences a significant increase in cash reserves and lending from financial institutions. The effect of such measures affects the income flow within Japan’s economy. This is based on the increase in purchasing power and the level of entrepreneurship and expansion among businesses. Furthermore, the effects are likely to affect the economy in the short-term and in the long-term.

On a positive note, adopting monetary easing within the economy will actually assist incredibly in the increase in money supply within the economy. On a short-term, increasing the money supply will actually reduce the short-term rates of interest. Usually, most small and medium enterprises within the Japanese economy acquire funding from commercial institutions in order to facilitate short-term growth. As such, through reduction of short-term rates of interest, the Japanese economy will experience a considerable increase in the expansion and amplification of enterprises based on the accessibility of loans from commercial institutions. In the short-term, Japan’s economy will also experience an increase in revenue stemming from increased production and purchase of commodities by consumers due to the different and wide range of products within the market (Kimura, 2004). Another short-term effect involves currency devaluation. Devaluing the price of the Yen against other foreign countries such as the US Dollar will actually assist the Japanese economy considerably in the short-term.

A decrease in the value of the Yen against other currencies such as the US Dollar will actually induce a decrease in the prices of exports to the country from other foreign nations. Furthermore, pushing down the value of the Yen versus the Dollar will increase the strength of the Japanese Yen, as such, decrease the importation of products and raw materials from the United States, and even decrease export prices to other foreign countries within the Eurozone (Bebenroth, 2007; Reith, 2011). In addition, using quantitative easing in Japan’s economy will result in a considerable decrease in interest rates in the long-term. A long-term decrease in interest rates will be valuable for the economy based on the realization that such as strategy could increase spending and investment among firms and households (Kagraoka & Moussa, 2013). This in turn, produces considerable revenues within the economy’s income flow.

Nonetheless, assuming expansionary fiscal policy and monetary easing in Japan will pose negative effects for the economy as foreign economies. Foremost, performing quantitative easing will destabilize the financial markets (Joyce, 2010). This is because the policy will actually encourage a considerable amount of investors to accept disproportionate risk. In addition, quantitative easing will actually increase the rate of inflation based on the increased circulation of money throughout the economy. As such, an increase in income flow will actually influence a stagnant supply of commodities, which will lead to increased competition for each product. Subsequently, such competition will lead to a distortion in incomes and prices (Ito, 2010). Furthermore, the government will embark on the importation of new products and services from other countries by using novel-printed money. This will lead to devaluation of the currency of the importer and discourage exporters, thereby affecting international trade and the global economy as a whole.

In conclusion, using quantitative easing is a financial policy presents advantages to the Japanese economy. This is according to its effects in leveling the interest rates to zero and negating deflationary pressure. Furthermore, applying expansionary fiscal policy and monetary easing will assist greatly in increase income flow within the circulation of income. Nonetheless, the defects arising from adopting this policy pose a considerable disadvantage towards the economy in terms of global trade.




Bebenroth, R., & Vollmer, U. (2007). Bank of Japan versus Eurosystem: A comparison of monetary policy institutions and conduct in Japan and in the Euro area. Intereconomics, 42, 1, 43-53.

Berube, W. J., & Pinto, C. N. (2010). Taxation, tax policies and income taxes. New York, NY: Nova Science Publishers.

Bowman, D. (2011). Quantitative easing and bank lending: Evidence from Japan. Washington, D.C.: Federal Reserve Board.

Dolan, E. G. (2007). Introduction to macroeconomics. Redding, CA: Best Value Textbooks.

Fujiki, H., Okina, K., & Shiratsuka, S. (January 01, 2001). Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists. Monetary and Economic Studies – Bank of Japan, 19, 89-130.

Fukasawa, E. (2000). Misunderstandings and illusions about quantitative easing. Tokyo: Fuji Research Institute Corp.

Ito, T. (2010). Great inflation and central bank independence in Japan. Cambridge, MA: National Bureau of Economic Research.

Iwamura, M., Kudo, T., & Watanabe, T. (2005). Monetary and fiscal policy in a liquidity trap: The Japanese experience 1999-2004. Cambridge, MA: National Bureau of Economic Research.

Joyce, M. (2010). The financial market impact of quantitative easing. London: Bank of England.

Kagraoka, Y., & Moussa, Z. (2013). Quantitative easing, credibility and the time-varying dynamics of the term structure of interest rate in Japan. Journal of International Financial Markets, Institutions and Money, 25, 1, 181-201.

Kimura, T. (2004). Quantitative monetary easing and risk in financial asset markets. Washington, D.C: Divisions of Research & Statistics and Monetary Affairs.

Langdana, F. K. (2009). Macroeconomic policy: Demystifying monetary and fiscal policy. New York, NY: Springer.

Reith, M. (2011). Unconventional monetary policy in practice: A comparison of ‘Quantitative Easing’ in Japan and the USA. International Journal of Monetary Economics and Finance, 4, 2, 111-134.

Shirakawa, M., & Nihon Ginko. (2002). One year under “quantitative easing”. Tokyo: Institute for Monetary and Economic Studies, Bank of Japan.

Wieland, V. (2009). Quantitative easing: A rationale and some evidence from Japan. Cambridge, MA: National Bureau of Economic Research.






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